Donald Low

Opinion | As China’s property crisis grows, can nationalisation help rebalance its economy?

Developers’ debt crisis raises concerns about health of banks, local governments’ fiscal viability, impact of falling property prices on consumption and economic growth

China can look to US experience where partial nationalisation of troubled assets, financial institutions helped restore financial stability, boost economic recovery

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The collapse of the property boom in China has led to a series of defaults by a number of the country’s major developers. Photo: AFP

Donald Low

Published: 2:00pm, 4 Sep 2022

The collapse of the decade-long property boom in China – triggered by a government crackdown on overleveraged property developers in early 2021 – has led to a series of defaults by a number of the country’s major developers.

More worryingly, the crisis in the property sector has raised wider concerns over the health of banks that have a great deal of exposure to the troubled developers, the fiscal viability of local governments that have become over-reliant on land sales to finance themselves, and the drag of falling property prices on consumption and economic growth.

All these have affected China’s ability to rebalance its economy towards one driven more by consumption, rather than (real estate) investments.

It is worth highlighting that the debt crisis China is now grappling with is neither uncommon nor surprising. About 30 years ago, Japan was entering a lost decade of slow growth, deflation, and deleveraging as a result of the collapse of a credit boom that had pushed the value of real estate around the Imperial Palace in Tokyo to be higher than that of California.

The Asian financial crisis 25 years ago began as a currency crisis but its underlying cause was also too much debt (denominated in foreign currency), much of which had flowed to unproductive, speculative investments, especially in real estate.

Fifteen years ago, the global financial crisis began with the collapse of the subprime mortgage market in the United States. About 10 years ago, the euro-zone crisis exposed the high levels of leverage in a number of European countries, and how much of that had financed consumption and commercially unviable infrastructure and real estate projects.

What made these crises so damaging for financial stability and economic growth was that they were driven by debt, and that much of this debt was used to finance (unproductive) real estate. While governments may be able to rescue overly indebted financial institutions and stabilise the monetary system, these often come at great economic and political costs – at least in the short term.