Three dozen cranes tower over the Tianjin West Railway Station, part of a 501-billion yuan ($74-billion) government-funded building boom in this city of 9.8 million southeast of Beijing.
Like hundreds of other local Chinese projects, Tianjin’s construction is financed in part by land sales that are dropping as China’s real-estate slump takes hold. Property sales slid at an annual 8 percent rate in June. Selling land produced 41 percent of Tianjin’s income last year, according to China Index Academy, a Beijing real-estate research firm.
A cascading collapse in local finances could force the central government to shore up banks that lent to local government entities, said Jim Walker, chief economist at Hong Kong-based Asianomics Ltd., in a June 7 interview. Banks could “easily” be saddled with bad loans of more than $400 billion over the next two years, he said.
“These local-government vehicles probably hope their projects will be able to service their debts,” Walker said. “If they don’t I doubt they’ll worry about repaying the loans; they will just assume that somewhere else in government will have to take on the bad debt.”
After their success in propelling growth, local authorities are now faced with the consequences of Premier Wen Jiabao’s crackdown on the real-estate bubble. Falling property sales risk an erosion of revenue accounting for as much as 30 percent of local budgets, according to Standard Chartered Bank.
Must Do Something
The China Se Shang Property Index has tumbled 42 percent in the past year, underperforming the 23 percent drop in the benchmark Shanghai Composite Index.
“Local governments were encouraged to invest in these projects and now they’re feeling like, ‘Hey, wait a minute!’” said Barry Naughton, author of the 2007 book “The Chinese Economy: Transitions and Growth” and a China specialist at the University of California San Diego. “They will be taking their funding platforms to Beijing and saying: ‘We’re going to go bankrupt. You have to do something about it.’”
China has more than 1,000 county-level governments and hundreds of city and municipal councils that get revenue from local taxes, land sales and central-government transfers. Authorities sold or allocated 319,000 hectares (788,266 acres) of property last year, up 44 percent from 2008, netting a record 1.6 trillion yuan, Ministry of Land and Resources data show.
Wen’s government aims to make Tianjin’s Binhai New Area an economic engine akin to Hong Kong neighbor Shenzhen and Shanghai’s Pudong. Tianjin reported 180.5 billion yuan in revenue last year. While the data don’t detail land sales, China Index Academy estimates the receipts at 73.2 billion yuan, a 67 percent surge over 2008.
A Tianjin Bureau of Land Resources and Housing Administration spokesman who identified himself as Mr. Duan said by telephone in response to questions about the city’s land sales: “Healthy, stable and in good order,” declining to comment further.
Duan’s assessment contrasts with National Bureau of Statistics figures last week that showed real-estate sales across the country fell for a second straight month in June compared with a year earlier.
The reversal comes amid a slowdown across the world’s third-largest economy. China’s expansion cooled to an annual pace of 10.3 percent in the second quarter, according to data released last week, from 11.9 percent in January to March.
The growth rate for industrial production in June dropped the most since 2008, excluding distortions from the Lunar New Year holiday, signaling a further deceleration in the economy in the second half of the year.
Policy makers are seeking to cushion the decline in property by promoting low-cost housing, a strategy that itself is complicated by newly falling prices.
“What we’re likely to see is that local governments will hold onto the land and wait until prices are reasonable before supplying it,” said Ren Zhiqiang, chairman of Beijing-based developer Huayuan Property Co. Ltd., at a forum in Beijing on July 12.
Sales of land for residential use in 103 cities in China dropped 28 percent in June from May, China Index Academy said in a statement on July 13. Shenzhen-based developer Gemdale Corp. saw first-half contracted sales fall 37 percent to 5.4 billion yuan and 43 percent by area to 482,900 square meters, according to a July 10 statement.
JPMorgan Chase & Co. cut its profit estimates for China’s property developers by an average 9 percent in 2010 and 11 percent in 2011 due to a “substantial slowdown” in transactions, analysts led by Raymond Ngai wrote last month.
Beijing-based hedge fund manager Jenny Tian is avoiding state-owned banks, including China Construction Bank Corp., Industrial & Commercial Bank of China Ltd. and Bank of China Ltd., because of concern over the credit they’ve extended to local authorities. The Springs China Opportunities Fund she helps manage has bought bank stocks that include China Merchants Bank Co. and China Minsheng Banking Corp., which have smaller amounts of such lending, she said.
Lending by China Merchants to local governments makes up about 5 to 6 percent of its total outstanding loans, while China Minsheng’s total is 6 percent to 7 percent, Tian said. Big state banks’ lending is between 15 to 20 percent, she calculates.
Barclays Capital forecasts China’s property prices may fall as much as 30 percent in the next 12 months. Kenneth Rogoff, the Harvard University professor and former International Monetary Fund chief economist, said in a Bloomberg Television interview July 6 that a “collapse” in real estate is beginning.
More Than India
The threat facing China’s local governments is another shock wave stemming from the global financial crisis and policy makers’ response to it. As credit froze in the wake of Lehman Brothers Holdings Inc.’s collapse in late 2008, China encouraged a lending spree to cushion the economy. A record 9.6 trillion yuan of loans was issued in China in 2009, more than India’s gross domestic product.
Some local governments set up vehicles to circumvent rules that prevent them borrowing directly. Total local government outstanding debt last year rose to a record 11.4 trillion yuan, according to calculations by Victor Shih, a political economist at Northwestern University in Evanston, Illinois, who has spent months researching local government finances.
The borrowing has effectively pushed China’s overall debt to 71 percent of GDP, Shih said. By comparison, the IMF sees Spain’s ratio this year at 66.9 percent, the U.S. at 93 percent, and Greece at 133 percent. Its estimate for China excluding local-government liabilities is 20 percent.
Talk of a local debt crisis in China is “overstated,” said Ha Jiming, Hong Kong-based chief economist at China International Capital Corp. He tallies the nation’s total debt-to-GDP ratio as 43 percent, “still one of the world’s soundest.”
Home prices are set to fall as much as 20 percent in a “healthy” correction, Michael Klibaner, head of China research at property broker Jones Lang LaSalle Inc. in Shanghai, said July 7. The property boom has been driven by cash rather than debt, meaning there’s little chance of the forced selling that exacerbated the U.S. housing-market collapse, he said.
Shih said that some local governments are so stretched that “if they don’t sell land within a few months they may have to choose between paying salaries and pension benefits and paying interest payments to the bank.” He identified Tianjin, Chongqing and Wuhan as cities “with higher levels of leverage.”
In Tianjin, credit to special financing vehicles last year reached more than 700 billion yuan, according to Shih. Tianjin’s units have also lined up an additional 840 billion yuan in credit lines with banks, he said.
Construction of the 180,000-square-meter Tianjin West Railway Station and transport hub, which will include a 1.3 billion yuan underground link to nearby Tianjin Railway Station, helped propel the city’s economy to a 16.5 percent growth pace last year. The challenge for local leaders will be to sustain that without the bump from land-sales financing.
“To imagine a situation where eventually Tianjin is able to repay all of its debt, you have to believe that it will grow at a phenomenal rate,” said Shih. “There are aspirations and there’s reality.”