More signs have emerged testifying to the severity of China’s financial woes. Local governments seem to have become so cash-strapped that they have resorted to paying their bills with unfinished and unbought apartments left by the nation’s ongoing property crisis.
This kind of barter constitutes a slide back into the sort of primitive economics usually associated with third-world economies. It speaks to how far China has fallen and how much Beijing needs to do to get back on an acceptable development path.
The origins of these problems are reasonably straightforward and should be familiar to regular readers of this column. Beijing planted the seeds of this mess with years of excessive promotion for residential real estate development. In the early stages of China’s development, this emphasis was appropriate. Still, Beijing continued with easy financing terms and support from local governments for too long after the country had caught up with its housing needs.
Because of Beijing’s lavish support, developers could offer attractive deals to potential homebuyers, driving up purchases, while developers took full advantage of the seemingly favorable situation by using debt to finance as much development as possible. At the same time, local governments, flush with revenues from booming land sales, also borrowed heavily to create as attractive a civic environment as possible.
At its height, real estate development in China rose to almost 25 percent of the economy. Since most developed economies seldom dedicate more than 5 percent of their gross domestic product (GDP) to real estate development, the figure itself speaks to how far matters have gone.
In 2019, as Beijing’s planners began to realize how excessive residential development had become, they abruptly withdrew the earlier support. And since they gave little or no warning of the change, neither developers nor local governments had time to adjust.
Developers showed the damage first. They began to fail. The first signs of the unfolding disaster arrived in 2021 when the huge property developer Evergrande announced that it could not meet the equivalent of some $300 billion in obligations. A number of other such failures followed.
Not surprisingly, construction activity stalled, and so did the pace of homebuying. The financial system suffered from the volume of unpaid debt, especially since, at the same time as the developers were failing, Chinese households that had pre-purchased from property developers could no longer complete their payments and refused to fulfill their mortgage obligations. And because Beijing refused to implement policies to mitigate these financial strains, they only got worse.
In the absence of cash to pay their bills, developers and local governments have resorted to the only thing they have in abundance to pay their bills: unfinished and unoccupied apartments. Three examples should give a sense of what is happening.
Changi City has discharged the equivalent of $25 million in unpaid gas bills to Xinjiang East Universe Gas with some 260 unfinished apartments in what was originally planned as a luxury housing development.
Shanghai Urban Architecture Design has taken 115 apartments to settle the equivalent of some $10 million it was due.
Police departments in Dejiang, Yuping, and Sinan have settled the equivalent of some $10 million owned to a software developer with the transfer of apartments from a failed property developer.
Praise for imagination is due to these people. Still, their resort to what has effectively become a barter economy should give a sense of how severe the problems of Chinese economics and finance have become. Beijing might have headed these problems off by acting promptly at the first signs of failure, but as it was, the authorities took no action until late 2023, fully two years after Evergrande collapsed.
What they have done since has done little to arrest a crisis that has had so much time to build in the interim.
