Beijing’s Debts Come Due

How a Burst Real-Estate Bubble Threatens China’s Economy

By Brad Setser August 30, 2022

The Chinese real estate sector is teetering. The largest private Chinese developer has defaulted on its external bonds. Most developers are struggling to refinance their domestic bonds. Home prices have gone down for the last 11 months. New construction is down 45 percent. The most acute stress can be traced back to developers who raised large sums by preselling yet-to-be built apartments. Some, however, failed to set aside reserves to guarantee the completion of these units, and households that took out mortgages to buy these homes have threatened to stop paying.

China’s real estate crisis poses financial risks, but it is ultimately a crisis of economic growth. Since the development and construction of new property is estimated to drive over a quarter of the country’s current economic activity, it is not difficult to see how a temporary downturn in the property market could become a prolonged economic slump.

The country’s state-backed financial system can still take large losses and thus avoid a financial meltdown. One state-backed institution can put money into another state institution, limiting the chance that losses on lending to a failed property firm will lead to the collapse of its creditors and trigger a cascade of defaults. The Chinese government can ask state-backed developers to complete building projects abandoned by private developers, providing financial help through the state policy banks. Pervasive government intervention isn’t the best way to run an economy over time, but the presence of institutions with deep pockets can prevent the destabilizing withdrawal of all financing to the property market..................Beijing’s Debts Come Due