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Opinion | An obscure new department heralds a shift in China’s debt cycle
China’s Ministry of Finance recently established a new debt management department, unifying the management of government debt quotas, issuance and redemption. What appears to be a simple adjustment reflects a profound shift in China’s economic governance.
To counter the impact of the 2008 subprime mortgage crisis, China launched a 4 trillion yuan (US$563 billion) stimulus plan, shifting its growth model from exports to investment. From 2009 to 2014, growth was mainly driven by infrastructure investment and related manufacturing investments, from 2015 to 2019, by real estate and government public investments, and from 2020 onwards, by hi-tech and new energy manufacturing investments.
Corresponding to these three phases of investment, China’s economy has experienced fluctuations every five to six years. Gross domestic product (GDP) growth has tended to align with the typical Juglar cycle – a fixed investment cycle of seven to 11 years – or equipment renewal investment cycle fluctuations.
Debt cycles have mirrored these investment cycles: local government leveraging from 2009 to 2014, household leveraging from 2015 to 2019 and central government leveraging since 2020. Between 2009 and 2017, manufacturing enterprises, urban investment companies – special purpose state-owned enterprises responsible for financing local investments – and real estate firms also leveraged off each other.
China’s debt expansion created a large number of tangible state-owned assets, such as roads, bridges, factories, buildings and industrial estates. These state-owned assets are closely tied to urban land, which is entirely owned by the government. As a result, land has become the core collateral in China’s investment and debt cycles during the past decade or more.
Some land is leased cheaply to industrial businesses to address employment and taxation. Some land use rights are sold at high prices to real estate firms to generate substantial land transfer fees, which are a major fiscal revenue source for local governments to fund investments and repay debts. Some land is injected into urban investment companies and used as collateral to secure financing, including loans and bonds.
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