China’s credits to various countries along its much-discussed Belt and Road Initiative (BRI), the most ambitious infrastructure undertaking in history, have recently been criticized for drawing poor countries into a debt trap by extending huge credits. Myanmar is often cited, as well as Sri Lanka. Malaysia and Pakistan are renegotiating multi-billion-dollar projects of previous regimes. What is not widely being examined however, is whether there is a danger that the China economy itself is vulnerable to a far larger debt trap, one that could spell trouble for the BRI project itself as well as for the unprecedented four decades of booming China economic growth. Could it be that debt is becoming China’s Achilles Heel?
The state of the Chinese economy is likely far graver than its leaders are admitting. The cause is not the effect of the US trade war. Rather it’s the structure of a debt-driven growth that has defined the unprecedented rise of China to a world economic power second only to the USA. What is called “socialism with Chinese characteristics” looks more and more like the Western debt-collapse model on steroids.
At the heart of the current problem is China’s home real estate debt market.
A debt trap is defined as a situation where a borrower takes on new debt to repay existing debt to a point where the terms of the original debt have drastically changed for the worse and default looms. During the Alan Greenspan US sub-prime debt bonanza more than a decade ago, millions of Americans took out loans, often with little bank checking, in a securitized mortgage market where home prices were rising so fast many believed they couldn’t lose. Until the bubble burst in early 2007.
In China over the past decade or more, a rising middle class began to realize for the first time they could buy goods never before possible. The American and European cars their labor produced were the first big consumer purchase boom. Over the past decade and more, that consumption has shifted to buying a home or apartment in one of China’s many growing cities. Much of the financial credit for the housing construction boom has come from unregulated local finance vehicles, a form of shadow banking, as the large state banks were tightly controlled.