China’s Debt Crisis Goes Far Beyond Evergrande

China's real estate sector is the foundation for everything
September 28, 2021 Updated: October 6, 2021

News Analysis

China’s foreign debt, including U.S. dollar debt, stood at $2.4 trillion at the end of 2020, a 4 percent increase from the previous quarter. The country’s corporate debt, combined with household debt, now exceeds 300 percent of GDP.

The U.S.–China trade war, along with the pandemic lockdowns, have slowed the economy. The CCP hopes that increased internal demand will replace lost export revenues—but that’s unlikely, given China’s high savings rate, high unemployment, and an aging population.

China’s debt-to-GDP ratio appears to be growing at a rate of about 11 percent, which means that it will outpace GDP growth, even in the best of years.

To mitigate economic stagnation, the Chinese Communist Party (CCP) has been using state-owned banks to funnel credit to the private sector and increasing domestic consumption. Along with increased loans has come an increase in defaults. By the end of 2020, Chinese banks were holding $466.9 billion in non-performing loans (NPL).

Research conducted by academics from several universities in Singapore suggests that the NPL situation may be much worse than it appears, with banks concealing non-performing assets from regulators. As Chinese banks have been bundling NPLs and selling them off to investors, these researchers estimate that more than 70 percent of NPL packages were resold at inflated prices. The way the sales were structured, the NPLs were moved off of the banks’ balance sheets, but the banks remain exposed to the NPLs. It’s estimated that the real number of NPLs that banks are exposed to could be two to four times the reported figures.

These suspicions of underreported NPLs have been further substantiated through an analysis of the income of Chinese banks. Basically, if Chinese banks have X amount of outstanding loans, they should have Y amount of income from loans. Since their income is substantially less than expected, this would suggest that a significant percentage of their loans are non-performing.

In addition to debt held at banks, China’s off-balance-sheet lending, the so-called shadow banking industry, totaled about $13 trillion in 2020.

While the pending Evergrande defaults have been dominating news coverage, the troubled property developer is merely the tip of a very large iceberg, which is rotten at the base.

Crumbling under $300 billion in liabilities, Evergrande has abandoned countless development projects across China, leaving 1.5 million buyers waiting for their homes to be finished. While Evergrande is just the latest and highest-profile developer to run out of money, this problem has been going on for years. Recently, in the city of Kunming, 14 buildings were destroyed in a controlled demolition because the developers ran out of money seven years ago, and city officials grew weary of looking at half-finished apartments riddled with quality defects.

Epoch Times Photo
Villagers hold banners during a protest rally in Wukan, Guangdong Province, on Dec. 19, 2011. They demand central authorities to take action over illegal land grabs and the death of a local leader in custody. (STR/AFP/Getty Images)

Similar, pre-sold, unfinished, and abandoned real estate developments, by a slew of companies, are scattered across the country.

Chinese developers generally pre-sell apartments before they are built, combining those funds with bank loans to complete the construction. Consequently, when demand drops because people move out of the city, or fewer people than expected move into a city, or when oversupply kills sales, the developers have no way of obtaining the funds to complete the projects and they go unfinished. Often, this means that loans will not be repaid to the banks and creditors. Other results of these failed completions include people living in unfinished buildings and massive protests against developers.

Evergrande claims to have 1,300 projects in more than 280 cities. Ostensibly, these projects will be added to China’s list of unfinished and abandoned developments. The company is the largest issuer of high-yield dollar-denominated bonds, many of which are coming due and it cannot afford to pay. This will send a ripple through an array of lending institutions, shaking the very foundations of the property industry, which accounts for about 27 percent of all loans and 29 percent of China’s GDP.

Real estate also represents 78 percent of the wealth of urban Chinese—meaning that if the sector collapses, it will take the economy, big developers, small investors, homeowners, and families with it.

Beyond China’s borders, countries that export steel, copper, concrete, and raw materials for building such as Australia, Brazil, and Zambia, depend on demand from China’s real state sector. If China stops building, then natural resource markets could tumble and these countries could suffer.

Over the past several years, the CCP has cracked down on China’s $1 trillion wealth management product (WMP) market. WMPs are opaque low-risk, high-yield investments sold at banks, the proceeds of which are generally passed to property developers.

In order to avoid a 2008-style subprime mortgage crisis, Chinese regulators have made it illegal for WMPs to invest in bonds that are rated lower than AA-plus. This new law is expected to disqualify $390.5 billion of WMPs, which will have to be swapped for lower-yielding, high-quality investments.

In spite of the CCP’s attempts to rein in these products, they still represent yet another massive slice of the economy that’s directly or indirectly dependent on the real estate sector.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Antonio Graceffo, Ph.D., has spent over 20 years in Asia. He is a graduate of Shanghai University of Sport and holds a China-MBA from Shanghai Jiaotong University. Antonio works as an economics professor and China economic analyst, writing for various international media. Some of his books on China include "Beyond the Belt and Road: China’s Global Economic Expansion" and "A Short Course on the Chinese Economy."