China’s effort to fill empty houses has created a wild cycle of debt

Cities have been buying surplus apartments from developers over past three years

Oct.October 13, 2017 10:30 AM

Aerial view of downtown Tangshan in China (Credit: Getty Images)

An attempt by the Chinese government to fill empty apartments is pushing indebted cities farther into debt.

Over the past three years, more than 200 Chinese cities have been buying surplus apartments from developers and moving in families who live in neighboring villages or on condemned city blocks, a program it plans to continue through 2020, according to the Wall Street Journal. Local governments spent more than $100 billion in 2016 alone to either buy housing or subsidize purchases.

The central government is supporting this strategy through bank lending, and it has helped give the property market a boost, which makes up a third of China’s economic growth.

However, the strategy is undergirded by debt: cities borrow from state banks to pay for the subsidies and purchases, and they pay back the loans by selling more land to developers, who then build more housing and accumulate more debt, prompting another bailout from the state.

Local governments borrowed 972.5 billion yuan last year from the government’s main housing lender, which was nine times higher than three years earlier. More than half of those loans went to housing purchases or subsidized buying, while the rest funded government-built houses.

The country’s deputy housing minister Lu Kehua defended the program in May, saying it has “played a positive role in steady economic growth.”  [WSJ]Eddie Small

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