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How China's Debt-Cutting Measures Are Leaving Local Governments In The Red


China wants less debt. It has borrowed huge amounts of money to build sometimes unnecessary infrastructure to fund economic growth. But the country's debt-cutting measures are leaving local governments in the red. NPR's Beijing correspondent Emily Feng visited Inner Mongolia and discovered the transition away from debt is harder than it seems.

UNIDENTIFIED VENDOR: (Foreign language spoken).

EMILY FENG, BYLINE: Vendors bearing electric wagons of cabbage and knit hats hawk wares outside a new high-rise residential complex. The complex can house thousands of people. One hundred and twenty more similarly sized compounds are currently being constructed across the city of Baotou. But first, the existing homes have to be demolished.


ZHOU FENGHUA: (Through interpreter) Developers are not being reasonable. If they offered us a fair rate, of course we would move.

FENG: That's 72-year-old Zhou Fenghua. She's lived on this plot since 1993 in a single-story brick house she built with her husband. Dozens of other families once lived here in what China now considers a shantytown. But now Zhou's block is a dusty, empty lot. A developer wants to build on the land, so Baotou's government has paid her neighbors to move away. Zhou's house is one of a handful left because she thinks she's being underpaid. Her neighbor, Bai Shi, has also stayed. He says he's being threatened because he won't move.

BAI SHI: (Through interpreter) The developers even sent thugs to break our windows to intimidate us.

FENG: Baotou's total real estate investment is growing at more than 18% a year over the last two years, twice the national average. The city is covered with half-demolished patches of shantytown nestled right up next to new high-rises. This is surprising because China's leaders, including President Xi Jinping, are afraid of a housing bubble. But Baotou's continued with its real estate binge. It's connected to the city's efforts to tackle its problem with debt.

DINNY MCMAHON: It's sort of by hook or by crook, they're trying to get tax revenues, you know, however they can.

FENG: Dinny McMahon is the author of the book "China's Great Wall Of Debt" and once covered the country's debt-fueled building spree as a journalist. He explains it's in the interest of Baotou's government to help developers build new apartments.

MCMAHON: Not just because they're selling more land but because of all the additional fees and tax incomes that they generate. Same goes for housing sales.

FENG: So Baotou's built more, even though it's also taken steps to cut down on unneeded infrastructure. In late 2017, it cancelled a $4.3 billion subway, even though it had already broken ground. The cancellation was a shocking reversal. The project had been approved by the country's top policymakers. A few months later, Baotou's statistics bureau admitted it faked the city's annual revenues by as much as 50% to hide their decline. That means Baotou has to rely even more on a familiar source of tax revenue to support existing debts.

MCMAHON: I mean, a city like that isn't really blessed with that much at the end of the day other than property development.

FENG: Dependence on infrastructure locks small, industrial cities like Baotou into a vicious cycle of borrowing and land sales and property development, even though China already has a surplus of real estate that just sits empty.

MCMAHON: If you come in and there's already this debt burden, and particularly if you've come in after a point where the last two or three mayors have done exactly the same thing, there's effectively no way out of this cycle.

FENG: That cycle prolongs China's problems with debt and lays the foundations for a potentially bigger slowdown in the future. Meanwhile, developers have their own problems to worry about. The ones behind the Baotou Louvre, a compound of luxury French-style chateaus, needed to build around stubborn holdouts who won't move, erecting a thin partition to hide them from sight. And developers are also saddled with huge levels of debt themselves, so they're having a harder time finding the cash to buy land rights.

LUI GUOFENG: (Through interpreter) This used to be all single-story buildings. Developers tore down all the one-story buildings already. Now the two-story buildings are left, but it's more expensive to compensate the owners of these two-story buildings.

FENG: Lui Guofeng has been renting a room in this shantytown block for 13 years. But he thinks he'll be able to eke out only a few more before having his home torn down.

LUI: (Through interpreter) This location is really desirable. It's close to the train station, bus routes. It's got good transportation.

FENG: And in China, Lui notes, good real estate goes fast.

Emily Feng, NPR News, Baotou, Inner Mongolia.


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