Will China’s debt crisis and real estate bubble implode? Determining the origins, the severity and the Chinese government’s tools in managing the debt and real estate crises.

Abstract

Attempting to understand the causes, the real severity and the future of China’s two biggest economic woes in 2017, namely, (1) the debt crisis and (2) the real estate bubble, is currently on the mind of the vast majority of financiers and economists in the West and in China alike. The two topics, together with the general slowing down of the Chinese economy, have been on the forefronts of financial news outlets since the early 2010s, but it is since 2015 and onwards in particular, that these two primary economic concerns within the Chinese economy have been dominating “Biggest Risks to Global Economy” lists and economic forums’ panels. As of 2017, the Chinese debt crisis, and, to a lesser extent, the real estate bubble in select largest cities are serious problems within the Chinese economy. This paper will show that the real estate bubble is, in part, a symptom of a bigger, overarching debt crisis in China. The paper will further argue that, in part due to an extensive and applicable set of financial tools and monetary policies available to the Chinese government and its various policy-setting institutions such as the People’s Bank of China (PBoC), the Chinese government is likely to avoid the ‘bursting’ of either the overall debt or the real estate crises. Lastly, the paper will show that, despite a large set of tools available to the Chinese government, a wave of financial deleveraging is necessary and expected, which is likely to cause a slowdown in the rates of annual GDP growth.