How China's “debt traps” work
noahpinion.blog
noahpinion.blog
The government of China let developers sell un-built apartments to future residents. The residents not only paid down payments, but took on a mortgage obligation for an un-built building. "The majority of new properties in China — about 90% — are sold before being completed." - CNN. This produced a terrible incentive for developers to do huge numbers of housing starts and then not finish the building.
In most of the rest of the world, developers have to finance construction with their own money or a high-interest construction loan, then sell the completed building. This gives developers a strong incentive to finish the job. Building quality control is often a problem, but unfinished projects less so.
https://en.m.wikipedia.org/wiki/Real_Estate_(Regulation_and_...
> the money is in an escrow and released as the construction progresses.
too.
The problem is it doesn't work: the fund release schedule can't be perfectly aligned with each stage of the constitution on a cost basis. There's a large amount of unfinished buildings (rather than not started at all) at a certain stage - it's the point when the_amount_of_fund_released - the_construction_cost_so_far is maxed.
I like the USA solution more - no mortgage for unfinished buildings. Developers can still sell it, but good luck.
Once you can turn everything into a model and an equilibrium the biggest systems of the world become much clearer.
So what? They had a choice between paying more money for already built house now or paying less money but accepting the risks of developer's failure.
> This produced a terrible incentive for developers to do huge numbers of housing starts and then not finish the building.
Ugh, it's not like venture investing when developers are not liable for the failure of the company. The law usually (don't know exactly about China) skews the balance in favour of property buyers.
> In most of the rest of the world, developers have to finance construction with their own money or a high-interest construction loan, then sell the completed building.
And the cost of that high-interest construction loan is paid by the future residents. Not something you want when your goal is to give most of the population cheap housing.
A very large number of Chinese citizens will lose their savings to these ponzi-esque construction schemes. Vast waves of defaults may take the banks with them. In Albania something similar caused mass civil unrest.
https://en.wikipedia.org/wiki/1997_Albanian_civil_unrest
Ponzi/pyramid schemes captured two thirds of Albania's population.
Well, every clever businessman will simply increase the prices in such a situation since more people can now afford to pay more. Problem solved *not*. Markets are self-calibrating.
This is an absolute nightmare. Hundreds of billions of dollars in liability. And somehow getting the funding to complete these works will not improve their financial standing because they already took all the money for it.
Not sure if this is some kind of joke. Many countries have laws that permit selling appartments when they are about 80% complete. Some have lower, some higher percentages.
Just your average low-tier negative CNN propaganda, I guess.
I assume it's similar in most countries
What I call loan is a similar arrangement to mortgage. Buyer pledges property as collateral, pays about 20% out of pocket, rest is a debt to be paid. Defaults result in loss of ownership of property. The agreements are tripartite. Builder gets paid from the loan taken out by buyer in tranches and builder reputation matters along with market value assessment and buyer's credit profile for obtaining a loan.
When in fact, it's fairly normal situation almost anywhere in the world.
That other countries mortgage unbuilt homes is more a "what about" rather than "facts needed for reader to understand."
And it's infamous for misrepresenting the other parts of the world to better suit USA's interests. Cases of outright lying and negative propaganda that they know is a lie abound.
Since most people buy homes with mortgages, most homes in the USA aren't bought before they are built.
Banks can and do refuse to pay until things are completed and city inspections pass the work. Could a city inspector collude with a bank and developer to rip off customers? Sure... but even if that happens it can only be small scale. The odds of the scheme collapsing increases exponentially with every additional city/bank/developer participating.
Politically China works differently. I'm sure there are plenty of developers doing good work. That clearly must be the case - not every building is a pile of garbage. But being a more centralized single-party state with state-owned banks the opportunities for shenanigans is obviously higher. It may also be driven by how much local budgets are influenced by new projects rather than ongoing property taxes. There is an incentive to approve projects and it is embarrassing to admit we should be tearing down the new building because everyone involved cut massive corners... that might also scare off new customers for the next project. Better to cover everything up and keep the scam going.
For that matter state owned banks from any country are well-known for perpetually extending loans rather than admitting the loan is garbage. This is not unique to China nor news to anyone.
https://www.cnn.com/2021/10/14/business/evergrande-china-pro...
The exact quote is:
"[Then] there is the problem of unfinished projects, even if there is demand. The majority of new properties in China — about 90% — are sold before being completed, meaning that any setbacks for home builders could directly impact buyers, according to economists."
What is the problem with the paragraph? It describes a practice that is common in China but may not be known to CNN's audience. It mentions a pitfall of the practice, which is true and has played out many times, in China and elsewhere, easily verifiable. Nowhere does it say that it's a China only problem.
In fact, read the whole article before playing the victim. Not long. You'd be hard pressed to say it's more negative that a US-related economy news piece.
I don't know how it works in other countries but in France for new apartments you almost always buy them before or during construction, which allow new residents to settle in right after the construction has finished instead of waiting for months for the sale.
The way we deal with the incentive alignment is simply by having a justice system that makes sure contracts are actually enforceable and mandatory insurance policy for developers should anything bad happen to their company.
This happens in India also.
Poor quality construction work prevalent in mainland china. If you look for content with this keyword, you will find jaw dropping videos of constructions workers bending or breaking "rebar" with their hands, Owners chipping away concrete in high-rise buildings like its sand, etc.
Of course some of this can be propaganda, but considering it has a local name, there must be truth to it.
There are crappy building practices in any country. The real question is prevalence, which I can’t seem to answer.
Damn, sounds like NYC this past week. Here's one of many videos:
https://x.com/OfficialWildX__/status/1707867092832378884?s=2...
I'm not totally sure I understood what tofu dregging was, but there's no shortage of low quality construction, collapsing bridges, unmaintained infrastructure, etc. in the US.
Confucianism does not lend itself well to crucial infrastructure , you know, things you don’t want to collapse.
https://www.chinaexpatsociety.com/culture/the-chabuduo-minds...
It’s an entire mindset.
https://en.wikipedia.org/wiki/Surfside_condominium_collapse
https://www.npr.org/2022/01/28/1076343656/pittsburgh-bridge-...
https://www.bbc.com/news/world-us-canada-61290444
https://www.bbc.com/news/world-asia-china-57830767
https://www.npr.org/2022/05/05/1096810346/survivor-found-alm...
https://www.bbc.co.uk/news/world-asia-china-66286576
-—
You simply cannot compare the two.
I could provide examples all day of how Chinese culture and the CCP allows this type of phenomenon to continue unabated.
It isn’t to say that there are serious infrastructure concerns in America that continue to go unaddressed.
But the scale of graft and shoddy construction in China beggars belief. It extends into every aspect of enterprise, taking shortcuts is the absolute cultural norm.
https://www.chathamhouse.org/2020/08/debunking-myth-debt-tra...
That one is from 2020 but there are a lot of serious people looking at these complex issues.
Then it is outdated.
The new information related to the belt and road project's failures has only started to come up in the last couple years.
I can understand why someone who doesn't have the updated information, based on recent economic data, would have a more nuanced view.
But we have the new information now.
Poor countries need a lot of investment (0). Historically many investments failed and creditors ruined the country and made live of the involved people even more miserable. My gut feeling is that chinese investors are a little bit smarter but there are obviously problems as well.
(another gut feeling: china has too much money, they can't invest in US treasuries anymore) (1)
This US/China conflict is just stupid. Nearly everybody looses.
(0) Adam Tooze "The west has failed to keep its promises on aid"
https://www.ft.com/content/75d35382-32e4-4548-82e6-0d20d9984...
(1) https://markets.businessinsider.com/news/bonds/dedollarizati...
I wonder if an alternate route would be to use aid money as subsidy to attract private investment. Juice the yield on bonds to too-compelling-to-ignore, or offer backfill on short-term revenues if the project is speculative, and you could attract the world's financiers.
On the other hand, perhaps there's a hostility to existing finance to begin with. A lot of the developing world has had bad experiences with the mainstream Western financial system-- their banks and associated institutions are the ones coming in and demanding austerity, privatizations, and currency manipulations to settle their debts. Perhaps China just represents a fresh face: all they need to do is squeeze a little less to look good by comparison.
You'd want to genuinely want improvement for the people. Not for enriching a new set of brutal and corrupt elites that will do the bidding of the CIA/IMF/whatever, but actually want the people's lives improved in living standards, education, economic independence, etc.
Kind of like how China fast-forwarded themselves. In rose tinted glasses, I can see the Belt and Road kinda being like that, but of course it left out the development of manufacturing / stealing of technology that really underpinned China's rise.
The train station locations, however, are just non-sense. This is because they are too far, and for many stations, there is no "road" to connect to the city. Couple that with the retarded system they have to check-in which requires you to be in the station one hour before your train departs and suddenly a 40 minutes ride becomes a 2.5 hours ride. Might as well just use a regular bus?
In my opinion, the Chinese government is still living in the 80s (along with 80s technology). The Chinese economy (or parts of China) is living in a parallel reality with companies that are quite developed if not world-class. This means the Chinese government can "execute" quite advanced projects while being a peasant itself.
It's not clear what's sustaining the central government in China, or what's the level of discontent in the productive provinces.
[1] https://en.wikipedia.org/wiki/Railway_town
[2] https://pedestrianobservations.com/2017/09/07/meme-weeding-l...
>Shin-Yokohama Station opened on 1 October 1964, with the opening of the Tokaido Shinkansen.[4] At the time, the surrounding area was completely rural, and the site was selected as it was the intersection of the Tōkaidō Shinkansen tracks with the existing Yokohama Line
I'm not sure if that makes sense for Laos, but for China it seemed to work pretty well.
Airports of course also have enormous 'processing' time. It's normal to arrive 2 hours early.
They built the terminus in far away place for cheap land costs and easy acquisition. Now the expectation is that there will be further developments over there including folks moving nearby. It'll be huge win for the train company since they can starts charging very high land rent compared to their purchasing price.
Since there's already a China debt problem (and ROI problem) though, it's more likely the loans just dry up. That already started in 2017 (see graph in article).
>Note that although this is a debt trap, it isn’t really a case of “debt-trap diplomacy”, as some people accuse. Debt-trap diplomacy is where you get a country to owe you money, and you force it to make geopolitical concessions in exchange for loan forbearance. China doesn’t appear to be doing that; instead it appears to simply be walking away with as much of the money as it can, and thumbing its nose as it walks away, and leaving developing countries bitter and resentful.
>But in the long run, this is almost certain to hurt China’s image in the world. Back when the money was flowing, the countries of the Global South saw China in a highly positive light — after all, the West’s money always comes with strings attached.
>But because the Belt and Road was so ill-conceived, this warm fuzzy feeling always had an expiration date. Now that the Belt and Road has basically failed, and the cash faucet has been shut off, delight at China’s seeming largesse is clearly going to be replaced with resentment and distrust. Acting like a mafia loanshark is not generally a way to win friends and influence people.
It's like rich people telling poor people to stop getting avocado toast in the US.
Given China's hostility, you would think europe and america would wake up and get past their moral high grounds but having someone to look down on is hell of a drug.
Starving and impoverished people don't want a lecture on democracy and human rights.
To me, the most terrifying thing is considering how much of this democracy and human rights I enjoy here is dependent on our economy and military being #1.
As a Danish person I wish the EU had actual hard power but in the end of the day Denmark doesn't have the same geopolitical interests as Hungary, Bulgaria, and Slovakia. In fact their views are the polar opposite of ours.
Now, you can always assume I only say this because I live in a poor country that everyone pushes around. But when we zoom out a bit, the same could soon apply to the entire continent. We are not united and that's bad for all of us because our competitors are more much bigger and better integrated.
Did you have something else in mind? I don't exactly pay any attention to US politics but I am sure their states are competing with each other because they have their own interests in mind. But that applies to cities too, does it not?
I guess people don't like hegemonies unless they greatly benefit from them. Go figure.
Of course Danish interests are not aligned with the rest of the EU. They live in a hygge bubble, not having been under Russia's boot. Their worst problems are immigration and Islam. Denmark has the most opt-outs compared to any EU state: Euro, EU Blue Card, Europol. It took a second referendum this year to abolish their defense opt-out. And of course this is bad for all of us.
https://en.m.wikipedia.org/wiki/Danish_opt-outs_from_the_Eur...
This is pretty much solved by the enumerated powers clause. Outside of the dozen or so federal powers the central government handles, the states operate mostly autonomously (something non-Americans, particularly Europeans, find impossible to comprehend; at least based on common internet discourse).
Presumably, the same could be done for a Federated EU; but it's unlikely a good chunk of the nations (particularly the wealthy ones) would be willing to cede their ultimate sovereignty to a central power.
Mexico has a very weak and self-defense oriented military, but is under no threat of occupation or annexation. Mostly because it's continued existence benefits both the US and Canada, which offer a proxy protection. It also keeps relatively good trade relations with many powerful nations and has a large consumer economy.
Or Mongolia, which exists because neither of it's neighbors could reasonably occupy it or would allow the other to do so.
Military strength is one way to ensure protection. It's certainly not the only way.
You're only reinforcing the point with your flights of fancy, not countering it.
If you can disprove it then disprove it. Just asserting which conclusion to believe isn't going to work.
No sovereign nation should be borrowing from anywhere other than itself.
Instead firms should be selling equity denominated in the local currency for foreign currency - where they need foreign imported capital equipment. If nobody wants to invest on those terms then you have to build the equipment yourself.
For a nation to develop successfully it needs patient money, not hot money.
Loans are patient money. As long as the borrower pays as agreed then they can do as they please. Whether the original lender holds the asset to maturity or sells it on to another investor makes no difference.
Most of the high profile failures with foreign investment stem from corruption and incompetence. Switching from debt to equity won't cure that.
It could change who gets left holding the bag, though.
Presumably if Chinese firms held equity in the hydroelectric plants, they would care about whether they were built correctly and won't collapse. As it stands they get paid either way (according to the article).
That's not patient money then is it. That's money that requires regular service - mostly in a foreign currency.
Patient money gets paid as and when there is profit to service it.
I find it weird. Nobody would listen to me pontificating about how to design a microkernel and talking about "the problem with programmers".
Because if that country wants to sell their stuff to you, that would their only option - other than taking Rupiyah directly.
And if your country doesn't do it, then some other country will - because new sources of demand don't come by every day.
That's how you avoid a 'debt trap' and the debt prison that comes from countries not being able to go bankrupt.
And as Steve Keen regularly says you are better off studying System Dynamics than economics. It has more application to the real world.
Noah Smith isn't even an economist, he's just some know-it-all internet pundit who happened to have graduated in economics a decade ago.
From his own words[1]:
> Back in 2006, the original reason I thought of getting an econ PhD was actually to become an econ pundit and writer.
If anything, he's a former economist (until 2016) who's now a pundit discussing many topics going way beyond his academic expertise (hence my “know-it all” moniker above).
[1]: http://noahpinionblog.blogspot.com/2016/04/life-update-leavi...
Economists don't only study interest rate and banking?
https://davidgraeber.org/wp-content/uploads/debts-history-im...
Edit: responded to dead comment
[1] https://www.africanliberty.org/2018/09/10/like-zambia-sri-la...
[2] https://saharareporters.com/2021/11/26/china-takes-over-ugan...
[3]https://www.business-humanrights.org/en/latest-news/kenya-ch...
As someone who sporadically did political organizing with David Graeber, I assure you he was sharply critical of US policy as it pertained to exploiting developing countries. He also happened to be a professor of anthropology at Yale and the London School of Economics. How you have determined he was a "foreign agent or useful idiot" is curious. But I know David would have found it as funny as I do.
Other defenders of the Red Khmers had even more impressive credentials. Need I remind you who was the writer of "Distortions at Fourth Hand" and "Manufacturing Consent"?
By definition, all useful idiots have impressive credentials. Without credentials, they are not useful.
Are you talking about the entire Western block where in the 80 when western powers brought support to the milicia in order to piss off the Soviet Union-backed Vietnam, or what?
That's easy. Generally speaking, anyone who is critical of empire-building is seen by that empire's apparatchiks as a "foreign agent or useful idiot."
The criticism doesn't come from any position of principle, it's just us-versus-them tribalism.
You mean, the long history of overthrowing governments, imperialistic wars and debt-trapping entire nations into selling their state-owned assets to US interest groups and funds?
Your memory may be short lived, but there are many of us who know and remember.
And, by the way, China hasn't started invading random countries all over the world...yet.
Bhutan, India, and Vietnam would have a word.
I spent just 2 minutes for this. I could go on, but you get the picture.
> In May 2006, the United Nations Mission in Liberia (UNMIL) released a report detailing the state of human rights on Liberia's rubber plantations. According to the report, Firestone managers in Liberia admitted that the company does not effectively monitor its own policy prohibiting child labor. UNMIL found that several factors contribute to the occurrence of child labor on Firestone plantations: pressure to meet company quotas, incentive to support the family financially, and lack of access to basic education.
> Beginning in March 2019, the Washington, D.C. based Center for International Policy funded an investigation into alleged labor and environmental standards violations by Firestone in Liberia, culminating in publication of the February 2020 report, "A Bridge Too Far: Social and Environmental Concerns in Bridgestone's Liberian Rubber Plantation and a Plan for Remediation."The report details labor rights violations of Firestone's collective bargaining agreements with the Firestone workers union; Firestone's failure to honor pension payments for retired Firestone employees; and, Firestone's contamination of local watersheds resulting in elimination of fish and natural wildlife.
How much better would it be if we eliminated the IMF, shrank government, and lowered taxes so individuals could freely choose how to benefit the Global South via nonprofit giving? If people don't give voluntarily, why should they be compelled to give in the form of taxation?
I feel like Graeber, an anarchist, would appreciate a decentralized solution like that instead of trying to handle this from the top down.
Society is a mutually beneficial arrangement. I agree that you should be able to "opt out" and live in a homestead way out in the forest, and that if you do so you should be exempt of taxes. But unless you live in a Kazynscki cabin, that view makes no sense.
The VAST majority of the federal budget goes to entitlements. Another massive chunk goes to paying interest on debt because we spent money we didn't have on entitlements. An similarly large chunk goes to defense (Which you could make an argument for, except the VAST majority of which is not actually used for defense, but intervening in far away conflicts)
So going back to all the "society" items, well, the roads, infrastructure electricity, basic services, police, clean water, airports; all the stuff you really need for a society: They're a tiny, minute sliver of the money the government takes from us on a regular basis. You could reduce taxes by 90% and still provide everything you need from a functional society without the parasitic drain on the economy.
The real parasitic drain on the economy is the large accumulations of capital that prevent the Invisible Hand from manifesting. Being alive is an inelastic good. If people have to choose between starving to death or labor for scrip to use at the company grocery, it breaks the efficiency of the market at valuing labor.
That's what those entitlements pay for.
Maybe you think that's not worthwhile, fair enough. Unfortunately for you, many of your fellow citizens and taxpayers disagree.
Like, that is an extremely strong claim and I'd appreciate if you could provide some evidence for it.
It might be predatory private entities looking to get their hands on state assets, or it might be the Saudis or Chinese looking to exert more political power.
If we want to seal ourselves off from most of the world and stop trading or participating in regional security arrangements, then this is a reasonable approach.
I think people underestimate how much of our material wealth in the west is reliant on these trade and security arrangements.
Countries like the United States can pursue a North Korean model and try to produce everything domestically, but the standard of living is going to plummet.
True colors emerge.
As an educated member of a developing country, I know that many so called "foreign investments" from the West are preceded (in fact, it is a requirenment) by huge loans from IMF and the World Bank.
This money is then wired to the investor, who is paid in 10s of thousands euroes for each employee. Every large state-backed loan eventually ends up in the pockets of western investors.
https://davidgraeber.org/wp-content/uploads/debts-history-im...
The purpose of the IMF is not to help countries out of some kind of benevolence, it's to use debt as a control mechanism over other countries.
https://theintercept.com/2023/09/17/pakistan-ukraine-arms-im...
But has the US threatened countries if they don't vote with them at the UN, or seized their land and/or assets for non payment of debt?
https://apnews.com/article/united-nations-china-europe-ukrai...
Have they ever put countries into debt then stolen land based on that debt?
Your example btw was about raising arms for a third party conflict, not for something that directly benefits the US. Which weakens your argument.
China won, all that money invested was almost all to Chinese construction overcapacity. So that capacity was exported to useless prestige projects.
Poor countries paid the bill ( mostly) and China is paid twice (foreign loans going to Chinese workers is a double win).
And getting back the money from loans is also a win.
A lot of that money didn't "get back" but ended up in various officials' offshore bank accounts. ( Many executives at China Development Bank got busted for corruption https://www.caixinglobal.com/2021-11-08/chart-of-the-day-cor... ) And then there's the opportunity cost of not having those companies build something useful instead.
And it wasn't going to get any better.
They did also succeed at a small coverup for their construction overcapacity at home.
But let's be clear: all those projects had to be paid.
There's just a difference to get the money without actually delivering those projects, not everyone is happy :)
China pays for infrastructure to be built of the type and scale in countries that haven't seen this type of investment since their respective post-war expansionary periods, which most likely ended 60+ years ago. We Americans don't like it, because this represents moves towards the attempted changing of the guard, but we can't do anything but complain. At this point we can't invest in our own infrastructure, much less improve other countries'. But it feels like these infrastructure investments should have happened decades ago, and their net effects would have been to raise the standard of living of millions, or billions. Agreed that this plan seems to be winding down, unfortunately it doesn't seem to work.
It looks like China will actually pivot their economy to tech. Airplanes, computers, microchips, and soon, software...
If financing by providing loans is not investment, well, then we are saying that it's something like the article seems to imply, which is that you have to end up with an ownership stake in order for something to be an investment?
If you were buying government bonds, would you not consider that to be an investment?
Non-equity lending is definitely still investment, and is probably less predatory...
Specifically referring to this line of the parent comment:
>China pays for infrastructure to be built of the type and scale in countries
When in fact China did not just "pay for" these projects. And they are not "invested" in the prosperity of these people any more than the US was.