Real estate are the main source for local governments to get money, and the lingering crisis because of excessive spending might be hard to solve, says Victor Shih in NPR. China is having a property crisis of its own, much different from that in the United States, but no less severe, he argues:
“The entities that are doing the leveraging in China are not individual people, but instead local government entities which have borrowed trillions from the banking system to develop real estate projects in the first place,” says Victor Shih, an expert on China at Northwestern University.
Shih has been researching local governments’ finances in China. He says, for example, that about half of the Shanghai government’s revenues come from land sales. Because local governments need this income, he fears that measures to cool the real estate market might not work.
“Local governments now are forming their own real estate developers and would actually buy land from itself. As this becomes more common — and it is becoming very, very common — then local governments have a high stake in maintaining and increasing the value of real estate in their own jurisdiction,” he says. “Therefore, I think local governments may intentionally ignore a lot of measures that are meant to deflate real estate prices.”