China’s real estate development bubble is bigger than the recent state audit showed.
Moody’s said it has identified, from banking reports, specific loans that were excluded from the audit report. The discrepancies are enough to bump up the total local government debt in China from the reported $1.6 trillion to $2.1 trillion. Of course, there are surely additional loans that neither the Chinese central government nor the banking regulators know about. Moody’s worries about what may happen to the banks financing some of this debt.
In a cryptic statement today, China said it would be holding local government officials accountable for the level of debt held by their local governments. This does little to reduce the scale of the current debts, but it’s a statement intended to warn officials away from excessive borrowing in the future. Debt levels are being added as a factor to consider in officials’ performance appraisals, hurting the employment prospects of the officials involved in large-scale real estate speculation.
Local governments are more directly involved in real estate development in China than in other countries, and unusual levels of local government debt there may fairly be assumed to be related to real estate projects. Many of the projects could be legitimate and valuable, of course, but China has a long history of letting initiatives in all areas of the economy grow much larger than any conceivable justification. The rest is the same as in any country: the excess real estate development projects do not result in revenue to make payments on the loans.