Chinese Cities’ Risky Borrowing Binge

Workers toil by night lights with hoes, carving the Olympic rings into the ground in front of an unfinished 30,000-seat stadium, a gymnasium, and a swimming complex in Loudi, a city of 4 million in Hunan province. Loudi is paying for the project with ¥1.2 billion ($185 million) in bonds, guaranteed by land that city officials value at $1.5 million an acre. That’s about the same as prices in Winnetka, a Chicago suburb where the average household earns more than $250,000 a year. People in Loudi take home $2,323 annually. And there are no Olympics scheduled to arrive here. Ever.

The project will increase property values throughout the city, officials reason, and sales of city-owned raw land for residential development will help pay back the loans used to finance the improvements. “The debt isn’t a problem as Loudi is not a developed place,” says Yang Haibo, an official with the city’s financing authority, as he sits with colleagues in a smoke-filled meeting room under a No Smoking sign. “It’s an emerging city.”