CHINA’s $9 Trillion Debt Disaster

Video Summary

As of 2023, China’s local governments have accumulated a staggering $9 trillion debt, equivalent to more than half of the country’s GDP. This massive debt was built up over the past 30 years, primarily through local government financing vehicles (LGFVs), which were established in 1994 to empower local authorities to raise debt and fund infrastructure development.

Initially, the system worked well, as land sales by local governments increased rapidly, with total annual income rising from 3.8 trillion yuan in 2016 to 8.4 trillion yuan in 2020. However, since 2022, the property market in China has experienced a sharp decline, and land sales have plummeted, with total income falling by 2 trillion yuan to 6.7 trillion yuan and then by another 1.1 trillion yuan to 5.5 trillion yuan in 2023.

The crisis has left local governments struggling to service their debt, as they are not allowed to use tax revenue to do so. Instead, they are forced to rely on land sales, which have become stagnant. This has created a significant problem, as the value of the debt exceeds the value of the underlying assets.

As a result, bondholders are facing a daunting task. The majority of the debt is held by Chinese institutions, which are ultimately controlled by the Chinese state. To refinance the debt, local governments must issue new bonds, but with the property market in a slump, there is little confidence in the ability to pay back the debt. The Chinese authorities may be forced to intervene, potentially bailing out the local governments and injecting large sums of capital to maintain stability.

Ultimately, the future of China’s economy hangs in the balance, with the potential for a domino effect as failing bondholders could lead to a broader financial crisis and recession.

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