If the bubble bursts, will the culprits pay for their sins?
Not necessarily. Local governments will lose revenue and the ability to use inflated land as a means to raise bank loans. But when their access to funds generated by the real estate bubble is cut, local governments will most likely do two things—they’ll cut back on their wasteful investments in infrastructure and prestige projects and also reduce local services, thus hurting ordinary people. Local government officials themselves shouldn’t be expected to go on a strict diet of fiscal austerity. In all likelihood, they will continue to enjoy their generous perks.
State-owned enterprises whose real estate projects have gone bust will not pay a price, either. None of them will be forced to pay back the bank loans since, in the eyes of their executives, paying back loans from state-owned banks is like moving money from one pocket to another—not exactly a very meaningful exercise. As before, bad real estate loans will be written off. It’s a Chinese version of ‘heads I win, tails you lose.’Enjoying this article? Click here to subscribe for full access. Just $5 a month.
So who will foot the bill for the anticipated collapse of China’s ‘bubbly’ property sector?
Unfortunately, China’s taxpayers will twice be made the victims by the housing bubble. In the bubble years, they are priced out of the market for affordable housing. When the bubble bursts, they’ll pay for the clean-up. When Chinese state-owned banks write off their bad loans, they don’t do so with money growing on trees. Instead, the Ministry of Finance will issue special-purpose bonds to recapitalize the banks—and fund the bail-out with future tax receipts.
Many Chinese officials often claim that China is exceptional. In this case, they may have a point. In the West, greedy capitalists cause bubbles; in China, greedy communists do.
MinxinPei is an adjunct senior associate at the Carnegie Endowment for International Peace and a professor of government at Claremont McKenna College