Empty Buildings And Wasted Debt: The Chinese Economic “Miracle”

There’s no doubt that the Chinese economic miracle is real. When you move 500 million people from rural to urban settings, taking them from small farms and putting them in a specialized labor force, the economic dividend is massive. That’s how you keep GDP growing more than 7% for 25 years. But along the way, they wanted more.

Beyond building factories and housing for new arrivals, local politicians started building massive, wasteful projects.

Political meeting halls…

Unused apartment buildings…

Empty shopping malls…

Part of it might have been poor economic planning, but a bigger, and more common, problem was at work.

In China, businesses buy off the local politicians for contracts to build in their areas. When that attracts new jobs, the central government rewards those politicians for their contributions to economic growth. However, the buildings serve no purpose other than creating jobs and lining the pockets of businessmen.

In essence, local politicians were forcing construction to bolster their personal political standings.

This might have ended as nothing more than a story of hubris writ large, except for one thing.

Much of that new construction was financed with debt.

Local governments in China issued so much debt over the past 20 years that this category now totals 41% of national GDP. In the U.S., state and local debt combined is only 17% of GDP. Without a productive use for many of the new buildings, there is no way to repay the debt.

Now, national government officials are staring down a couple of bad choices.

Do they let their cities and provinces fail to repay, or do they bail them out?

Letting some of the profligate borrowers fail would make a fine example for others, but there are huge costs. A lot of the debt is held by individual investors. Letting the local government entities default would mean a loss of wealth for consumers, and would likely dissuade them from buying such bond issues in the future.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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