So I got it slightly wrong. I think Michael Hudson is very good but his more informal talks aren’t always the clearest. That comes across in the following extract from an interview but it made sense after a couple of read throughs for me (maybe you’ll have more luck the first time):

Who has benefited the most from China’s boom?

[Interviewer]: Let’s talk about China’s debt problem again. Unlike the United States, China has been very cautious, some might say conservative, about expanding its debt. Although China may need more aggressive fiscal and monetary policies to boost the economy, especially now; and the central government’s debt is quite low (some local governments are facing debt risks). China once debated whether China should also engage in fiscal monetization, especially during the 2020 epidemic. But considering the risks, the government ultimately rejected the proposal. What do you think of China’s trade-off between risk prevention and economic stimulus?

Michael Hudson: There are two ways for governments to create money, printing paper money or creating digital money. The use of digital currency, the Chinese government is already doing.

In the West, the state allows private banks to create credit, and the wealthy create credit and lend it to the government. But China does not want to have an independent financial class, so the central government can start printing money; however, local governments in local cities and towns cannot.

So the question is, how do local governments finance spending? This is exactly the problem you mentioned that local governments are really facing. Since local governments at the provincial, municipal, and district levels cannot print money and issue bonds, they either go to the bank to borrow money or collect taxes, but the taxes are not enough, so local governments have adopted a financing model of selling land to real estate developers. This is one aspect of the housing and real estate issues facing China today.

I think there is a simpler solution, the central government is eligible to issue currency that it can loan to local governments for government-sanctioned social spending. In this way, there is no need to rely on land sales for financing.

In fact, local governments can use propaganda to say that we should do what the 19th-century Western classical economists wanted to do, so as to drive down land prices and house prices. Economists such as Adam Smith, John Stuart Mill, and Karl Marx argued that the government could tax the gains from land rents. You don’t want to tax laborers, industrial companies, but you can tax gains on land instead of the price increase of buildings on land.

In this way, people cannot go to the bank to borrow money to speculate on housing prices, because housing prices only reflect the cost of housing construction, and housing construction will not increase land rents.

The only thing that doesn’t want China doing this right now is the banking system. The bank told the government that instead of taxing the land, it would be better to sell it. Banks will lend to developers, and local governments will purchase land from local governments, so that local governments will be able to carry out construction.

However, more and more debts in China are accumulated in banks. In addition to developers, when residents invest more and more funds in purchasing houses, they must also borrow from banks and pay interest.

At this time we found that the banks will be stronger than the government, which is what the banks want. This is basically the core of the current conflict in China. Who profited from China’s prosperity and got richer and richer? Is it the Chinese people and the government, or the bankers and real estate developers? This is the biggest political issue in China this year.

I’m unsure what he means by ‘at this time’, whether this was a study done before the interview or just ‘today’ as in the era that we’re living in.

Edit: for an example of what I mean by unclear, take this quote:

Banks will lend to developers, and local governments will purchase land from local governments, so that local governments will be able to carry out construction.

I’m unsure if this is a misstatement and whether:

• it should read that “Banks will lend to developers, and local [developers] will purchase land from local governments, so that local governments will be able to carry out construction”, or
• local governments are buying and selling land to themselves, treating themselves as developers in order to make borrowing from the bank legal, perhaps, or
• this is a complicated way of saying local governments are mortgaging their property, or
• this is a complicated process whereby one local government borrows money from a bank as a ‘developer’ and purchases land from another local government, and vice versa, again perhaps as a legal loophole.

Let me know if you have any thoughts on this!