China's local government debt has increased by another 5 trillion yuan, and the total has exceeded 100 trillion yuan, which shows signs of China's version of debt monetization. From January to July this year, China's local government debt increased by another 5 trillion yuan, taking into account the previous 35 trillion yuan of local debt and the 65 trillion yuan of urban investment bonds led by governments at all levels, the scale of local debt has exceeded 100 trillion yuan. This trend of debt inflation is likely to continue to widen as the housing market slumps. However, how to deal with this huge debt has become a serious challenge. China's debt risks are now comparable to those of the United States, and a Chinese version of debt monetization may be quietly taking shape. So, how can the debt crisis be resolved through monetization?
However, to achieve an investment-driven economy, a virtuous circle in the real estate and infrastructure markets must be maintained. In other words, this investment logic can only be sustained if house prices continue to rise. If house price increases match rising household incomes, this model is actually not a big problem. But the problem is that China's real estate market has developed too quickly, and it took only 30 years to complete the process that other countries would take a hundred years to complete. This severely overdraws the potential for future price increases, while the growth of household incomes has not been matched accordingly.
Given the continued expansion of local debt, the solution may lie in monetizing it. According to the relevant monetary theory, only monetizing debt can alleviate or even solve the problem. This can be achieved in three ways:
First, asset securitization, especially non-performing asset securitization. Specifically, non-performing assets that bear huge debts are packaged to qualify them for circulation in the securities market. This will shift the risk from a small number of institutions to shareholders and funds, so when buying wealth management and funds, you should be cautious about the underlying assets.
Third, monetization drowns debt. The law of inflation suggests that what now seems like a huge debt may no longer be a problem in the coming years. By extending the maturity of local debt, the management gradually submerged the debt with the help of the ever-overissued currency.
In short, in order to directly resolve debt risks in the short term, the real estate market is crucial. At the very least, avoid further declines in house prices, as many areas such as trusts, bank management, loans and taxes are closely linked to real estate. However, it is clear that the takeover is no longer enough to support this market. Solving the local debt problem requires multifaceted efforts and policy coordination to stabilize the economic situation and mitigate potential risks.