In the city of Loudi in the Hunan Province, workers are building a 30,000 seat Olympic Stadium, swimming complex and gym. Despite the fact that the average income in the city is just over $2,000 a year and that no olympics has been scheduled there, the multi-million dollar project continues.
Financed by 1.2 billion yaun bonds backed up by land at an expected value of 1.5 billion yaun per acre, the land is projected to be worth as much as one of the richest land in America is, in Winnetka, a Chicago suburb. This has a problem though. Just as America was in in 2007 and before, a lot of project’s debts are financed through over valued collateral such as land. The land may be difficult to sell or even never completely developed and existent as envisioned.
Officials in Loudi value their 18 tracts of land at values 4x what actual land of that sort sold for in May. This problem is rampant around China as near $14.2 trillion yaun worth of local borrowing is based on its own government’s over expectations of land prices to keep going up. As the governments have started selling off some of this land to pay off debts, land values have fallen by 30%.
“It’s a huge myth that land sales are going to be able to even support the interest payments let alone the principal payments,” says Stephen Green