China’s miracle growth over the two decades preceding COVID-19 was greatly aided by three sets of forces: the liberalization of land development and accelerated urbanization and homeownership, entry into the World Trade Organization and resulting surges in foreign investment, and industrial policies designed to create world leaders in next-generation industries.
Too often, their projects did not generate the revenue anticipated, and many LGFVs are teetering on collapse. Beijing has reportedly approved provincial governments issuing $206 billion in new debt to help prop them up, but that would only buy some time and exacerbate local governments’ budget problems.
Development companies borrowed from China’s shadow banking system — trust companies — and ordinary banks. Evergrande’s bankruptcy potentially strands 1.6 million people who have paid for undelivered homes, and housing prices in major cities have fallen by double digits since Evergrande missed bond payments in 2021.
Through the first six months of this year, U.S. purchases from China were down 25% from last year, and its share of U.S. imports is down by one-third from just before former President Donald Trump took office.