For years we have been covering the story about China’s economy and why we should all be concerned. So, our concerns are now a reality. At the beginning of 2020, we warned you again about China’s economy.
In May 2019, TGP shared that similar to the US in 2008, a storm is approaching China. The excessive and extravagant construction projects, cash-flow challenges, and lack of demand in China led to a financial disaster.
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China’s real estate was the same as the US in 2008. With the growth of China, the investment in infrastructure and large housing projects through the country caused China’s fast-growing economy. One problem appeared. China invested too much in these random properties, and they are not empty.
There aren’t so many people there to fulfill the massive complexes, so they don’t give the money to cover the costs. The properties across China are unoccupied, and there is a cost to this. Bloomberg reported this in September 2018.
Cash-to-short-term debt levels at more than 80 publicly traded real estate companies tracked by Bloomberg were 133 percent on average in the first half, the worst since the first six months of 2015 and down from 297 percent a year earlier. Almost a quarter of developers sport a ratio below 50 percent.
But while business has been booming, developers have also been piling on the debt. Firms have been selling more bonds in the domestic market — and at the cheapest rates as investors shrug off default concerns. Those with dollar-denominated obligations, meanwhile, face higher borrowing costs as the U.S. Federal Reserves continues on its tightening path.
TGP shared that China’s debt is linked with the over development of the country, and it is massive. It is estimated that the cost is more than $6 trillion.
China may be sitting on a hidden debt pile of as much as 40 trillion yuan ($6 trillion), concealed off-balance-sheet by the country’s local governments, according to research from S&P Global Ratings.
Many local governments in China raise debt and hold it off their balance sheet, in order to avoid lending limits imposed by central authorities. S&P says that this is a growing problem within the country, and that the amount of debt held this way has likely ballooned in recent years.
Not only is the level of hidden debt held by local governments in the world’s second largest economy rising, but so too is the risk of those debts being defaulted on. Much of the debt is held by so-called local government financing vehicles (LGFVs), and S&P reports that central government may be willing to let these vehicles file for bankruptcy in the future.
“Default risk of LGFVs is on the rise. China has opened up the possibility of insolvent LGFVs filing for bankruptcy, but managing the default aftermath is a formidable task for top leadership,” the report noted….
The country’s total non-financial sector debt, which includes household, corporate and government debt, will surge to almost 300% of GDP by 2022, up from 242% in 2016. Fears abound that if this debt pile continues to grow, a spectacular blow up could be imminent.
During the past few weeks, you could read about the Evergrande collapse, the Hong Kong Company with more than $300 billons debt, and it can’t pay it.
The HK stock exchange halted trading on that company now. It has many properties in China and the debt that comes with it.
China cuts its electric power by one day a week, and it isn’t due to the burning economy, but it’s due to the opposite.