Efforts to Halt the Real Estate Crash in China Will Only Lead to Further Collapse – Mish Talk

Tweet Thread by Michael Pettis

• Very good article on a very worrying (but predictable) trend: “LGFVs are finding it difficult to borrow from banks and institutional bond investors, and are increasingly being forced to offer retail investors high interest rates to raise cash.”
• Not only is it dangerous to push this very risky type of borrowing down to retail investors, but the rates are so high that even if the money were used to fund very productive infrastructure projects (and it isn’t), local governments won’t be able to service the debt.
• But before criticizing local governments for dangerous behavior that will almost certainly come to a very bad end, spare a thought for the impossible position they find themselves in.
• Revenues are way down (and unlikely to recover), COVID-related expenses are up, and they are tasked with delivering enough economic activity to generate unrealistically high GDP growth numbers. To make matters worse, Beijing has imposed debt restrictions on them.
• So what else can they do? As I have long argued, China’s rising debt burden is the inexorable consequence of a growth strategy that requires GDP growth rates far in excess of what China’s very unbalanced economy can sustainably deliver.
• A soaring debt burden and increasingly risky debt structures are not bad outcomes caused by dishonest and incompetent individuals. They are fundamental to the way the growth model works.