Arthur Kroeber

I guess my view on this is that this local government land-based financing model was actually a pretty smart thing to do initially.

And for a decade or so, it worked quite well.

Local governments were sitting on a lot of these land assets.

It was perfectly – the land assets originally were undervalued quite substantially.

And so it made sense for the local governments essentially to try and capitalize some of the future value of land.

of these things and use them to finance infrastructure development.

This was not sort of a rogue policy that local governments came up with on their own.

It was actually sponsored by the central government and the China Development Bank back in the early 2000s, which was

Grappling with the problem that China at that point had a severe shortage of housing and infrastructure of all kinds including urban infrastructure and the question is like we need a lot more of this stuff.

How do we build it?

How do we finance it?

And they realized, oh, actually as we build this stuff out, the values of this land are going to skyrocket.

So let's, you know, essentially take some financing against that future land price appreciation and use that to build the infrastructure that makes everything possible.

And if you look at the first few cases of where this was done in the early 2000s, they had these estimates of what the land would ultimately be worth that seemed ridiculous and astronomical at the time.

they were in fact way too low.

They were way, way conservative on what the actual land price appreciation would be.

So you had a period of about eight or nine years where essentially the development banks, the state-run development banks, were doing this in a fairly controlled way, very, very successfully.

And then what happened was that after the 2008 financial crisis, the government said, oh, we just have to spend a lot of money

to gin up growth because there's been this global economic catastrophe.

And so they did a massive cash infusion into the banks and to the state-owned enterprises that said, spend, spend, spend, and basically all infrastructure is good infrastructure.