China reacts to the failure of real estate developer Evergrande with $310 Billion in debt.
The Associated Press has reported on this:
China’s central bank expanded the supply of money for lending Monday as Beijing tried to reassure its public and investors the economy can be protected if a troubled real estate developer’s $310 billion mountain of debt collapses.
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Evergrande Group’s struggle to turn assets into cash has prompted fear a default might chill Chinese lending markets and cause global shockwaves. Economists say the ruling Communist Party can prevent a credit crunch but it wants to avoid sending the wrong signal by bailing out Evergrande in the middle of a campaign to force companies to cut debt Beijing worries is dangerously high.
The People’s Bank of China said it released 1.2 trillion yuan ($190 billion) for lending by reducing the amount of money banks must hold in reserve. Beijing was expected to show support for lending after Evergrande warned Friday night it might run out of cash, but the central bank made no mention of the company, which it earlier accused of reckless borrowing.
“The company must be punished,” said economist He Fan at Peking University’s HSBC Business School.
Developers have been racing to pay off debt since Beijing lowered limits on their use of borrowed money last year. Weaker real estate activity depressed economic growth to an unexpectedly low 4.9% over a year earlier in the last quarter.
When Evergrande was first released, we reported exactly on this! We predicted this!
For years, China has struggled with banks and local governments that don’t report the real debt. These individuals don’t report trillions.
China’s hidden local government debt has swelled to more than half the size of the economy, according to economists at Goldman Sachs Group Inc., who said the government will need to be flexible in dealing with this as revenue is already under pressure due to a slowdown in land sales.
The total debt of local government financing vehicles rose to about 53 trillion yuan ($8.2 trillion) at the end of last year from 16 trillion yuan in 2013, the economists wrote in a report. That’s equal to about 52% of gross domestic product and is larger than amount of official outstanding government debt.
Local debt in the US was $2 trillion by the end of 2020. China’s GDP is about 2/3 that of the US $14 trillion vs. 20 trillion for the US.
China’s hidden debt is 4x higher than the one of the US.