China’s harsh medicine for property sector, local government debt could cause chaos, economists warn

Beijing’s stricter regulation of local government borrowing and real estate developers increase the risks that some of them may run out of cash, analysts say

Defusing financial risk was one of three economic priorities set by Chinese President Xi Jinping four years ago, which has seen scrutiny of hidden local government debts

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China's economy is losing steam as President Xi Jinping's government cracks down on corporate debt and energy use in pursuit of more stable, sustainable growth. Photo: AP

Published: 8:15am, 9 Nov 2021Updated: 10:06am, 9 Nov 2021

Beijing’s crackdown on the property sector and local government debt is likely to do more harm than good to provincial economies amid wider concerns about national growth, Chinese economists say.

Some domestic economists have called Beijing’s tighter policies too harsh and potentially self-defeating, which will likely leave provincial governments struggling to make ends meet, in a rare display of criticism of the central government ahead of the Chinese Communist Party’s key sixth plenum meeting this week.

Beijing’s stricter regulation of local government borrowing and real estate developers increases the risk that some of them may run out of cash, result in much weaker infrastructure and property investment and significantly aggravate the economic slowdown, Xu Gao, assistant president and chief economist of Bank of China International, warned in a note on Sunday.

“[The crackdowns] cannot truly defuse the risks in the macroeconomy, but instead will likely force the Chinese economy to give up its own special strengths and abandon an important economic growth engine,” warned Xu.

Xu’s cautious message lays bare growing doubts about China’s harsh medicine amid shrinking real estate and construction industry output and sluggish infrastructure investment, which has seen the country’s gross domestic product stall at 4.9 per cent in the third quarter.

The growth rate in land transaction revenue for China’s local governments slowed to 8.7 per cent in the first nine months of this year, compared with growth of 67.1 per cent in the January-February period a year ago, according to official statistics.

“China’s economy still needs a certain growth rate at present,” Ren Zeping, chief economist at Soochow Securities and Evergrande’s ex-chief economist, wrote in a note last week.