Friday, April 29, 2016

A Return to Local Real Estate Projects

China has turned again to real estate projects financed with local government loan guarantees as a way to boost its economy. That strategy worked reasonably well six years ago but left a worrying loan overhang that has caused some instability in the financial sector that continues to the present. There were also some boondoggles, projects built 20 years or longer ahead of any realistic need. The new projects are generally more practical. The first category I think of is parking lots. With more vehicles in China, there is an immediate need for parking spaces in some places. On the other hand, there are also projects like housing construction, a worrying trend after many of the larger residential buildings built five years ago remain vacant, or in some cases, unfinished. In a make-work program like this, the quality of execution is everything. If the boondoggle ratio is low enough and the loan performance is strong enough, the real estate projects will be seen as a practical way to boost a sluggish economy. If the reverse is true and the bad loans crash the economy, the program will be judged as the height of folly.

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