In recent years, many Chinese real estate enterprises have faced financial strains, resorting to using houses to repay debts. The local governments in China also have a massive hidden debt burden, with reports indicating that state-owned financing platforms and county-level public security bureaus are employing a model of using houses to repay debts. In November of last year, authorities launched a 1 trillion RMB plan to support local debt “restructuring.” Experts point out that using houses to repay debts is an emergency measure in response to local debt crises, with negative implications, and the current restructuring methods by central authorities may bring significant risks.
This year, China’s local governments have set up special teams to sell assets at low prices to raise funds to alleviate debts. A recent report by The Wall Street Journal highlighted another form of debt restructuring: using houses to repay debts.
According to the report, three years ago, Xinjiang Eastern Universal Gas Co., Ltd. (referred to as Eastern Universal) supplied natural gas to a state-owned financing platform group, accumulating approximately $25 million in unpaid bills. The largest state-owned enterprise in the financing group, Changji Urban Construction Investment Development, faced severe financial shortages, accumulating debts of $1.8 billion by June last year, with only $97 million in cash. After negotiations, Eastern Universal took over 260 unfinished residential units in a French-style residential complex being developed by its client.
Under the agreement, once the units are completed, a third-party company designated by Eastern Universal will sell the properties. If the sales revenue exceeds the gas fees, Eastern Universal can retain the surplus, otherwise, the company will be forced to bear the losses.
Furthermore, the public security bureaus in Dejiang County, Yuping County, and Sinan County, from 2012 to 2015, contracted “Huaping Information Technology” to install a surveillance system in their jurisdictions known as “SkyNet.” However, they were unable to pay the fees, accumulating debts exceeding $10 million. Eventually, “Huaping Information Technology” purchased housing from local developers and transferred the proceeds to the public security bureaus to repay the debts, effectively only receiving housing units.
Professor Sun Guoxiang from the Department of International Affairs and Business at Nanhua University in Taiwan told Dajiyuan that “using houses to repay debts” reflects the financial pressure on local communist governments due to declining land revenues. However, this is just a short-term measure to address debt crises, which may raise questions about the government’s credibility among the public and negatively impact the stability of public services.
“The debt issue of local governments in China is a concentrated manifestation of structural economic contradictions. The scale of local government debts in China amounts to hundreds of billions of RMB, and the hidden debt portion is difficult to fully disclose and resolve transparently, lacking sustainable growth in financial support. Local governments still rely on land revenues and infrastructure investment, but these revenue sources have weakened and cannot sustain the continual demands of debt repayments.”
US economist David Huang also told Dajiyuan that using houses to repay debts is merely an emergency measure in response to local financial debt crises which is unsustainable.
“The local debt crisis is the ‘gray rhino’ of the Chinese economy. While black swans are rare, gray rhinos are there all along, just often overlooked. Gray rhinos are actually more dangerous than black swans. Using houses to repay debts reflects the increasingly serious nature of local debt crises, which are currently unsolvable.”
Huang believes that the practice of local governments using houses to repay debts also reflects deep-seated management issues among Communist Party officials, as well as economic structural contradictions, and the fiscal revenue expenditure game between central and local authorities.
After years of rapid growth, the Chinese real estate market has accumulated as many as 90 million vacant homes. Over the past five years, the number of real estate companies filing for bankruptcy has exceeded 1,660.
Nomura Securities’ Chief Economist Lu Ting stated last year, “China has approximately 20 million unfinished presold properties.”
The method of using houses to repay debts has long been present among Chinese property developers. For instance, Greenland Holdings settled around $10 million in debt by transferring 115 residential units to Shanghai Urban Architectural Design Ltd. last year; and Ascendas Intelligent Technology took over 334 residential units, reaching a total of $50 million in debt settlement agreements with developers like Country Garden.
In the past, local Chinese governments heavily relied on land sales to support their finances, generating tens of trillions in profits. However, the recent collapse of the real estate market combined with substantial investments in infrastructure has led to massive debts.
According to data released by the Chinese Ministry of Finance on December 27th last year, as of the end of November 2024, the national local government debt balance stood at a staggering 46.5 trillion RMB. However, renowned investment bank Goldman Sachs estimated back in August 2023 that local government debt in China had accumulated to as much as 94 trillion RMB, including debts of local government financing platforms (hidden local debts).
During a press conference in October last year, Chinese Minister of Finance Lan Fo’an stated that from 2024 until then, the government had allocated 1.2 trillion RMB, approximately $164 billion, to help local governments repay funds owed to enterprises and address off-balance sheet debts.
In November last year, the Chinese Ministry of Finance introduced another major debt restructuring plan, including increasing the debt limit for local governments by 6 trillion RMB to replace existing hidden debts. At the same time, starting from 2024, an additional 800 billion RMB per year for five years was earmarked for new local government special bonds to supplement government financial resources specifically for debt restructuring, with an overall scale of 10 trillion RMB.
Huang stated that Beijing’s introduction of special debt and debt replacement measures is a temporary solution to alleviate local debt pressures, addressing symptoms rather than fundamental issues, merely postponing the problem.
“Even if Beijing allocates 800 billion to 1 trillion RMB annually for debt restructuring, given the current scale, it would take over 70 to 80 years to repay both the principal and interest, and debts would continue to increase during the process, so it’s basically an unsolvable problem.”
Sun Guoxiang expressed that the current debt restructuring methods in China only transfer risks, postponing rather than fundamentally resolving debt issues, resulting in a snowball effect where financial risks enlarge. Internationally, confidence among foreign investors may weaken, and there is a risk of sovereign credit rating downgrades.