Beijing recently announced a new raft of lending and support measures to boost real estate, building upon its rescue of local governments. Given the enormous oversupply and precarious financial state of developers, why Beijing would boost the real estate sector may puzzle many. To understand the real estate policy, we must understand what Beijing perceives as the risk.
Economists think of risks as discrete. The risk of homeowners who don’t repay their mortgages can be estimated precisely, and the value at risk is known in advance. This is a discrete set of risks to an institution that economists feel comfortable estimating. Banks and investors hold enormous data on homeowners and know with a high degree of certainty the expected loss from foreclosing if a homeowner loses his or her job and can’t repay the loan.
Economists struggle with undefinable or unknowable risks. Banks can estimate with relative precision the probability of homeowners losing their jobs, but they struggle to estimate the probability of bad news that may cause a run on the bank. Regulators struggle to quantify the impact of moral hazard from bailing out banks that cause them to make riskier loans, expecting a government bailout in the future.
China faces existential economic angst, but not the type faced by Western governments. All governments face pressure from the citizenry to deliver economic benefits, but democratic governments face the citizenry passing judgment on their performance every few years. The lack of democratic accountability presents a different risk to the Chinese regime.
The Chinese Communist Party (CCP) built its credibility domestically on delivering results. The CCP encouraged land sales to fund local governments and increase gross domestic product through rapid urbanization and infrastructure construction funded with enormous debt. The risk that a developer may not deliver an apartment, a bank collapses, or a local government can’t provide public services from excessive debt presents not simply an electoral risk but an existential risk to CCP power.
For years, Chinese regulators emphasized the need to restrain debt growth and provide better oversight of debt risks of real estate developers and local governments. For years, however, their debts grew wildly. CCP leaders believed that the risk of slower growth and restrained debt growth presented a higher existential risk to their claim to power than the seemingly more ephemeral risk of unrestrained debt.
The CCP doesn’t see debt as the risk; it sees lack of power as the ultimate risk. Any level of debt that can be managed as long as the CCP remains in power is the risk assessment by Beijing.
This view of risk should frame our entire outlook when explaining Chinese economic policy.
Beijing announced a slew of measures to support the real estate sector, including a “white list” of developers who expect to receive funds, guarantees for land purchases from local governments, and lowering restrictions on lending to consumers to purchase homes. Coupled with government propaganda support for the sector, the message was clear.
Logically, little reason exists to continue financial support for the troubled sector. The real estate development sector is effectively bankrupt with enormous asset-to-liability disparities, the population is shrinking, and massive home oversupply plagues the industry. Investing more money in a sector flooded by money over the years will do nothing but delay the inevitable restructuring.
So why are Beijing regulators and banks lining up to announce their support?
The risk that the CCP perceives isn’t a financial risk but an existential risk that the citizenry will grow discontent with CCP management or result in unbearable economic pain. This results in a never-ending avoidance of economic pain and restructuring that ultimately flows from continual bailouts. The CCP is more afraid of losing power than exponential debt growth.
In 2023, the CCP may have a policy point. With trillions of yuan (RMB) in losses in the real estate developers, authorities then can’t repay the banks or buy new land from local governments that just got bailed out themselves. Allowing any material pain risks setting off a major financial event, putting the entire economy at risk. It’s better to invest money that you never expect to see again and play for time rather than face reality.
This reveals the reality of the CCP’s economic policy: There’s no strategy other than buying time. There are no choices available that don’t risk enormous pain. For years, the CCP sold itself as an ingenious, long-term-focused policymaker, when, in reality, it focused on the yearly targets to the detriment of all else, accumulating debt at eye-watering rates. Now, there are no options other than accumulating more debt to pay off investments that will never be paid off to avoid making hard choices.
The CCP passed a law giving it sole dominion in China over determinations of entrance into the afterlife for believers of all faiths. If the CCP believes that it controls the afterlife, it certainly believes that it can manage the strain of debt as long as it remains in power.
