A year ago, one company was on people’s lips around the world.
Will China let the giant Evergrande go down? There was tension about this in Finland as well.
Evergrande is a Chinese real estate company that was unable to pay its due payments last year. It was feared that the company’s collapse would even trigger a global financial crisis.
That didn’t happen. Dubbed the world’s most indebted company, Evergrande is still standing, but the payment difficulties have not disappeared.
Soon there may be other types of debt-related news from China. There is a new, hidden debt bomb in the country.
The debt mountain started to grow after the financial crisis
The so-called hidden debt, which the Chinese local governments have collected for themselves through their own financial companies, is considered to be one of the possible sources of the new crisis.
Senior economist at the Bank of Finland’s Emerging Economies Research Institute Eva Kerola has studied China’s indebtedness.
The world’s second largest national economy began to take on more debt after the global financial crisis in 2008. China’s economy began to be revived with the help of heavily debt-driven investments, says Kerola.
In practice, economic recovery was largely on the shoulders of local governments. They took out loans through the financial companies they founded, and used the money to build roads, bridges and buildings, for example. In this way, more movement was given to the wheels of the economy.
After 2012, local governments’ financial companies took on an even more important role. They became tools for achieving strict economic growth targets.
In 2012, China’s central government set the country’s goal of doubling its gross domestic product by 2020. In practice, the responsibility for achieving the goals lies with local governments.
The local administrations have therefore forcibly set up such projects, the purpose of which is mainly to beautify the GDP numbers.
– They really had no choice but to take on more and more debt and always invest in less and less productive projects, says Kerola.
In practice, the financial companies of local governments have become indebted by taking loans from Chinese banks. They have also issued bonds that investors have bought for themselves.
The pandemic accelerated indebtedness
Today, the debt in China is roughly three times the size of the country’s gross domestic product.
In addition to China’s government debt, the figures show the debts of local governments, companies and households.
Unlike in Europe, in China it is difficult to draw a line between the public and private sectors. For example, local government finance companies are classified as private companies.
In any case, China has a lot of debt precisely because the country’s economic growth is largely based on debt-driven investments. There is so much debt in the private sector that such debt levels have not been managed before without some kind of collapse, Kerola estimates, referring to the collapses seen in other countries.
Chief economist of Nordea, which follows China Wind Koivun debt can be considered one of the biggest challenges of the Chinese economy.
– There is a huge amount of debt in China. It cannot be changed to something else.
The debt burden of local governments and their financial companies in particular has swelled rapidly. In recent years, this mountain of debt has also been increased by China’s strict coronavirus policy, the implementation of which is on the shoulders of local governments. A lot of money has been spent on testing, tracking and isolation, says Koivu.
At the same time, the problems in the real estate sector are also reflected in the financial management of local governments.
One major source of income for local governments has been the sale of land use rights. Now the rights are not bought at the same pace as before, because developers are running out of money. This is also why many local governments have to take out ever larger amounts of loans through their financial companies.
Is there a huge collapse ahead?
News agency According to Bloomberg, local government finance companies (you switch to another service) the total debt burden is equal to half of the country’s gross domestic product. An analyst interviewed by Bloomberg says that financial companies’ insolvency cannot be ruled out.
Eeva Kerola of the Bank of Finland says the same. However, he does not see that the indebtedness of financial companies would suddenly lead to a huge collapse. One of the reasons for that is the state’s large role in the Chinese economy, says Kerola.
– The Chinese central government is able to intervene in the situation in many different ways, and the country’s leadership has already heard statements that the hidden debt should be curbed. Of course, that doesn’t eliminate the possibility that some sort of policy mistake would be made.
The problems of the real estate giant Evergrande and the Chinese real estate sector in general began after the regulation of the sector was tightened. According to Kerola, similar chains of events may be seen if the authorities intervene in the indebtedness of local governments’ financial companies in a rash manner.
Kerola also reminds that there are big differences in the provinces of China. The biggest problems concern the most indebted and poorest regions.
According to Kerola, China’s debt problems begin to be reflected in the entire world economy and also in Finland at the point when the debt problems are a brake on China’s economic growth.
– If China’s economic growth begins to shrink sharply due to indebtedness, it will also be reflected in our exports to China and the operations of Finnish companies in China.
The big question now is whether China can even come close to the kind of growth figures that would keep the current amount of debt at a sustainable level, says Nordea’s Tuuli Koivu.
– If growth picks up, I think these problems can be taken care of. If the economy is disciplined more now, then the debt burden can become a problem.
However, according to Koivu and Kerola, the good news for China is that the debt is mainly domestic. China is therefore not dependent on foreign investors or loans granted by other states.
– I am most worried about if China’s growth sentiment continues to weaken. Then the effects will be really big around the world, says Koivu.
The subject can be discussed until Tuesday, November 22 at 11 p.m.
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