When we are looking at all these various problems together, we still have to pay attention to yet another complicating problem: and that is the problem of land.

As everyone knows, the debt bubble of local governments is also related to the real estate problem. According to recent data that we can find on the internet, the total local government debt amounts to 37 trillion yuan. If we add together all the hidden debt from city investment firms etc., which would be another 66 trillion yuan, you get a massive scale of about 103 trillion yuan of local government debt. A huge proportion of these debts were taken for the purpose of servicing mortgage debt. Why? There have been some analysis - over the years, the total amount of real estate properties, comparatively speaking, are concentrated in prefecture-level and the county-level cities. According to these statistics, 90% of the local government debt comes from debt taken by prefecture-level and county-level cities. These cities below Tier 3 and Tier 4 did not have a lot of inelastic demand, and many of them belong to regions where there are net population outflow, and yet they are also chasing real estate development, where a vast majority of the country’s real estate projects are taking place in prefecture-level and county-level cities.

Over the last few years, despite the emphasis of the central government on regulating real estate development, we still see the proliferation of work sites for real estate properties which has now become a ubiquitous sight in cities below Tier 3 and Tier 4. Everyone clearly knows that all these real estate projects are impossible to be sold, and that the trend of over-production/over-supply is already very pronounced. But why is everyone still doing so?

It is because real estate development is generating huge amount of GDP. With our current evaluation system that judges performance based on GDP, local officials who want to be promoted can only boost their GDP through real estate sector.

People have asked, why don’t we invest in the real economy instead? This is because since the 2008 Wall Street financial tsunami, and the 2009 global economic crisis that followed, in practice the model of China’s export-oriented economy - one that has deeply assimilated into the globalized economy and relied heavily on external demand to drive economic growth - had become unsustainable.

As we enter the second decade of the 21st century, what we have encountered is the continuous drop in external demand, and this drop in external demand can be traced way back to 2008, when the US in an attempt to save itself from a financial crisis, had turned to a large scale currency issuing, quantitative easing policy with super scale monetary loosening, and during which 3.9 trillion US dollars were created.

More than 60% of the created dollar liquidity ended up flowing into the international commodity market and resulted in serious inflation, triggering the dramatic rise of PPI (producer price index). And since we are a country that relies on large scale import of commodity and raw materials, such as energy and food, in reality we had absorbed much of the inflation, which directly impacted the real economy of the country. The profitability in real economy is already quite thin, in the event of an inflation crisis - and especially commodity price inflation - then the cost of paying for raw materials would rise dramatically, and causing the real economy to enter a recession. Capital outflow would then follow, and where did they all end up? To the real estate sector.

In such situations, we can say that a huge amount of capital had flowed into the real estate sector, and when combined with the push of real estate developers for the provincial and local governments to enclose more lands, had resulted in the massive expansion of real estate development market in China. Thus, the global financial crisis and the expansion of real estate market in China are deeply connected.

Objectively speaking, it is also deeply intertwined with the general trend of global consumption slump and the global economic recession, all of which has created a trend that not a single country could possibly resist against - a trend of disintegration of globalization, and we call it a “crisis of globalization”.

And it is precisely under such conditions, with the capital flowing out of the real economy into the real estate, and the interactions of all these factors, that culminated in virtual expansion of real estate sector in China. This was an objective process. As such, when local governments can no longer generate profit from the real economy, they would have to convert land - from a long-term resource that cultivates people’s livelihoods to a short-term resource that generates immediate profit and wealth. As such, local governments collaborated with real estate developers to enclose land, and profited from the price difference of land development.

And throughout this entire process, because the local government expenses continue to grow, its debt inflates as well - this inevitably creates another pressure against the local government, in which they are forced to take loans from the commercial banks to service the interest payments of the old debt in order to be granted issuance of new debt. Thus, the logic of land enclosure is really just a different operating mechanism to realize servicing the interests of old debt. And when all these factors are weaved together, we end up with the real estate crisis with many deep layers of internal causes.

Therefore I said: “the real estate crisis has already happened, but to save you is not easy”, because this is actually a problem where three huge bubbles are interweaved together:

First, we have the huge over-supply problem caused by the virtual expansion of real estate. Second, we have the financialization of the real estate sector caused by a massive flow of capital into real estate. If the real estate bubble bursts, and the asset price plunges, then the amount of junk/bad debt would rapidly increase. The financial bubble caused by the entire financial sector of China over-investing in real estate, would also very likely burst following the collapse of the real estate sector, and resulting in a seriously damaging financial crisis. This would be a similar logic to the 2007 subprime mortgage crisis directly leading to the 2008 financial crisis in the US. And finally, we have the debt crisis that we have just discussed.

As we face the combined bubbles that have a high potential of causing severe crisis, we need to develop proper measures tailored toward solving these issues. But we cannot focus solely on the real estate - I have just talked about this embarrassing problem, which is that real estate developers have already moved overseas much of their capital/profit not directly invested in the development of real estate properties, even if it caused bankruptcy for some of their companies within the country.

Without resolving all these complicated problems, how are you going to save the real estate sector? Are we really talking about saving the real estate developers that are responsible for the capital outflow to foreign countries?

These days there are a variety of ”engineered” discourses on this issue, and I hope that the public who are concerned about this topic don’t blindly follow these “engineered” discourses. The internet is a jianghu (江湖 - note: there is no English equivalent to this word. Think of it as a ”wild frontier” in wuxia novels where the shady underworld intersects with the civilized world), it is a complex world that has no shortage of groups and parties representing various vested interests. Which is why I was asking our volunteer group: should we say something about this topic at such a critical moment? Apart from conveying the notion that “it is not easy to save you”, we still have to discuss about how to resolve the problem of the “three bubbles” where a macro-level crisis would emerge if just either one of them bursts.