China's Red Lines: A Failure of Central Planning


Evergrande, China's second-largest property developer, has said that it might not make interest payments on its bonds this week. Some are calling this China's Lehman Brothers moment, and while that might be an exaggeration, a default could have serious repercussions throughout China's, and perhaps the world's, economy.

Evergrande is not a state-owned company, but its problems trace back to China's socialist history and the Communist Party's continuing control of the national economy. Nor are Evergrande's problems unique: although it has debts of more than $300 billion, the other four of the country's five-largest property developers have combined debts of more than $830 billion, and average of more than $200 billion each.

China's Debt Crisis

Indeed, debt has driven the entire Chinese economy for some time. The national government has debts of $7 trillion, or less than half of the country's gross national product(GNP). That sounds reasonable considering the U.S. national debt is now more than 100 percent of GNP.

However, unlike the United States, a large portion of China's economy is made up of state-owned enterprises such as the China State Railway, which alone has debts of nearly $1 trillion. Similar to the Federal National Mortgage Association (Fannie Mae), which racked up huge debts in the 2000s that were supposedly not guaranteed by the federal government, China doesn't necessarily promise to back up the debts of its state-owned enterprises. Yet many who invest in those enterprises may expect it to do so, and if it allows some of the larger ones to default, the others will have a difficult time borrowing funds. Standard & Poor's estimates that China's state-owned enterprise debt grew from 40 percent of GNP in 2008 to 74 percent in 2016, which probably means at least $12 trillion today.

On top of this are debts owned by local governments in China. China's local governments are supposedly not allowed to go into debt, but they can create local government financing vehicles, which are something like urban renewal districts in many U.S. states: to promote economic development, these vehicles can sell bonds to spend in the prefectures or municipalities, which local governments hope to repay out of the increased taxes collected from the new development. These have grown rapidly in the last two decades and have racked up debts of an estimated $5.8 trillions. On top of this, three government-owned banks have debts close to $5 trillion.

This brings government debt close to $30 trillion, which is almost 200 percent of China's GNP. Evergrande is important because, if it fails, it could lead to the failure of other private enterprises, then the cascading failure of state-owned enterprises and local government financing vehicles, ultimately bringing down the entire national economy.

The excerpt above appears with permission from the author. Read/download the full report at The Antiplanner (PDF opens in new tab or window).

Randal O’Toole, the Antiplanner, is a policy analyst with nearly 50 years of experience reviewing transportation and land-use plans and the author of The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future.

Photo credit: Charlie Fong via Wikimedia under CC 4.0 License.