If you pay close attention to the news, you must have heard the term "urban investment" quite often. Today, I will delve into the details of this concept for you.

Firstly, it's important to understand a basic fact: local governments, especially in China, except for the five provinces in the southeast, almost all other local governments do not have enough financial resources. This has been particularly true in the past decade or so, with the large-scale urbanization that requires more money, making local governments even more financially strained.

Many may not understand this, thinking that urbanization involves real estate developers building houses, so what does the government need money for?

Consider this: when the government wants to build residential buildings or industrial parks on a piece of land, don't they need to relocate all the people living there? Don't they need to ensure "seven connections and one leveling" (which means providing water, electricity, and leveling the land)? These tasks may seem to lack technical content, but they are actually capital-intensive operations. They require a significant amount of money and manpower, which developers cannot handle, leaving the government to deal with it. This makes local governments even more cash-strapped. In addition, there are other infrastructure projects, such as toll-free national highways and parks without entrance fees.

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Since the funds are insufficient, they need to raise money. According to our country's laws, local governments are not allowed to borrow from banks or issue bonds.

This is also normal, to prevent them from squandering money and going bankrupt, which would eventually require the central government to intervene and provide assistance.

The usual practice is for the central government to collect money from those provinces with fiscal surpluses and then distribute it to the remaining provinces. If the funds are still not enough, they have to issue national bonds to raise money and then transfer it to local governments. However, this method still does not provide enough funds.

Since the government cannot borrow money, can enterprises do so?

As a result, local governments have established some state-owned enterprises that borrow money from banks to undertake projects. These enterprises are what people often refer to as "local government financing platforms."However, these platforms are generally not called by this name, but are called something like "xxx Investment Company." For example, the first company of this kind is called "Shanghai Urban Construction Investment and Development Corporation," which is why everyone usually calls these companies "urban investment."

On the surface, these urban investment companies seem to have little to do with the government, but in fact, they are deeply bound to the government.

It's not complicated. If you establish a company and go to the bank for a loan, can the bank lend you money? Of course not, you have to mortgage your house. Even with a government background, the bank will require you to mortgage assets, and these urban investment companies also have to mortgage something. So some places put land, highways, and water supply under the name of urban investment, and then urban investment uses these assets as collateral to get loans.

This is also why many people say, "Urban investment debt is local government debt." In a sense, it is indeed the same thing, because the government's pots and pans are all placed in the urban investment company, and then mortgaged to the bank.

Since the government has invested so many resources in these companies, financial institutions often feel that even if something goes wrong in the future, the government will not stand by and watch, which is a "hidden guarantee." Therefore, financial institutions are also willing to lend money.

Some people even think that urban investment companies are just a shell of the government. When everyone buys financial products, some debt-based products are actually financial institutions buying urban investment debt, and then opening it to the public, giving the public some interest, and sharing the risk at the same time.

When the projects built by urban investment start to make a profit in the future, they will pay back the borrowed money, and everyone will be happy.

This model has been very successful in its overall operation. Over the years, urban investment companies have made great contributions to China's economic development. A large number of highways, tourism projects, and industrial parks have been established in this way. It can even be said that without this model, there would be no "infrastructure mania" in everyone's mouth.

It is normal to borrow money for infrastructure construction. After all, the United States also borrowed money from Europe for this purpose at the beginning, and later many canal and railway bonds went bankrupt, causing the creditors to lose a lot of money. However, there were also many European old wealth who made a fortune in the process of speculating on bonds. There were gains and losses, and everyone persisted in investing without hesitation.

But there is a big problem: most of the projects of urban investment have the nature of infrastructure, such as building a park or a road, which is difficult to make a profit. In fact, if these projects are easy to make money, there is no need for the government to promote them. Everyone would rush to do these things.For instance, there is a large park near my home, which is operated by a municipal investment company. The park does not charge an entrance fee and has almost no profitable projects. Inside, it maintains a huge artificial lake and employs a group of workers. The maintenance costs are unimaginable. If the company has borrowed money, unless the municipal government pays, it is likely that they will not be able to repay it in their lifetime.

Therefore, many municipal investment projects may not be profitable from the start. Banks lend them money mainly because they believe these projects are backed by the government and will definitely be repaid in the future.

As a result, beyond reasonable needs, many completely unreasonable projects have emerged. After all, banks are paying for it. In order to increase GDP, local governments have been frantically taking out loans for various projects, building and then demolishing, causing a huge waste.

So when discussing municipal investment bonds, we cannot generalize:

Some projects are essential for everyone, such as highways, wind power, hydropower, chemical industry, etc. These projects cost a lot but do not make money temporarily, but they have a positive value to the whole society. Although the municipal investment owes a lot of money, the overall value to society is positive.

Some projects are purely nonsense. For example, the tourism project in Dushan County, and the Guan Gong statue in Hubei that was demolished and rebuilt.

We cannot mix these two types of discussions. Recently, many people have been arguing, but in fact, they are deliberately mixing them together. People who oppose municipal investment say that all municipal investments are wonders of Dushan County, while those who support municipal investment say that all are hydropower infrastructure, so they are talking past each other.

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China's biggest problem is that its territory is too large, making it difficult for other laws to work well except for the laws of physics.

The most obvious example is the "Guizhou Water Si Building" project that Ma Du Gong has been heavily targeting in the past two years. If this project were built in the developed eastern provinces, it would most likely not have this outcome. Even in Xi'an, it might be able to become a smaller version of the Tang Dynasty Night City.Additionally, if you observe the city you are in, you will notice a "High-tech Industrial Park". For first-tier cities and the developed cities in the east, these parks may indeed have a number of industries. But for the vast majority of inland cities, this park is neither high-tech nor does it have much industry. But why is there still such a thing? It was also learned from the developed provinces in the east.

Even the "Urban Investment Company" model, which originated in the east, began to operate in Shanghai in 1995, and later the effect was very good, so it was promoted nationwide. However, in recent years, problems have arisen in the west.

The big outbreak of urban investment was after the "4 trillion stimulus plan" of our country after the financial crisis in 2008. That 4 trillion was not the government printing 4 trillion for everyone to spend, but the central finance made 1.18 trillion, and the remaining money was borrowed from the people and financial institutions. In this, local urban investment did not borrow less. After borrowing money, it was used for infrastructure construction, road repair, and housing construction, which promoted the big outbreak of real estate, and we successfully survived that crisis.

However, due to continuous efforts to borrow money over the years, there has been the "60 trillion debt, an average of 50,000 per person" that everyone has been talking about recently.

To be fair, this cannot be generalized.

Some places, especially the eastern provinces, owe a lot of money, but they make money quickly, and they can basically pay it back in a few years.

This is like you owe 100,000 yuan to Huabei and can't pay it back, becoming a deadbeat. Your company owes the bank several hundred million but is emotionally stable. The main difference is the cash flow, that is, your company makes money faster than you, and it's okay to owe more money.

The developed areas in the east owe a lot of money to the bank, but they are not worried, and the creditors are not worried, just pay it back slowly. If you go to see those urban investment bonds, you will find that the most borrowed is in the Jiangsu and Zhejiang areas. They are economically developed, and one after another, they start industrial bases, all of which need to borrow money to do, most of which are involved in urban investment companies.

But the debt of many western provinces is enough to choke, such as this time in Zunyi Road and Bridge, the annual income is not enough to maintain the expenditure, theoretically, it can't be paid back in the next life, so this time it was simply announced to extend the term by 20 years.

Here is a question, are the creditors brain-dead, don't they know the profitability of the west?Their minds are seriously normal.

Firstly, as previously mentioned, these urban investment companies are seen by them as shells of the government. Generally speaking, the government will not default on its debts. If the local government can't handle it, they can go to their "mother," which is the provincial government and the central government.

There are also some creditors, such as local small banks, like rural banks in Henan, who are willing to cooperate with the local areas.

The last and most important point is that everyone knows that if a person has poor credit, they have to pay higher interest rates. The interest rates of urban investment in the western region are generally higher. For example, the "Zunyi Road Bridge" that had an accident this time, the interest rate of the money it borrowed before was 7.5%. People think that government projects will definitely not default on their debts, and there are such high interest rates, so naturally they rush to subscribe. If you were in their place, you would also subscribe. In contrast, many projects in Shandong and Zhejiang have interest rates between 3% and 4%.

That is to say, the credit in the western region is not very good, and the interest rates are higher than those in the east. The east and west have a common "mother," and the "mother" will definitely take care of it in the future, with low risk and high returns. Everyone is competing to lend. However, we know that in the real world, the returns of low-risk investments are also low, which has created a "systematic arbitrage" space. Too many people go to arbitrage, and finally, it has become too large to be repaid.

The question is, now that there is so much debt, what should be done?

I don't know what the country will do, but the debt problem has never been a new thing. It can even be said that from the earliest debt records of the Sumerians to the present, there are only a few ways to solve the debt problem. It's just that each solution comes with a bunch of troubles, and it's painful, because debt is a price, and the price always has to be borne by someone.

According to this logic, there are basically three ways:

Creditors (that is, those who lend money) bear the burden;Debt is borne by the debtor;

Others bear it.

It is easy to understand that the creditor bears the debt, if the debtor cannot repay and goes bankrupt, the creditor's money will not be recovered. Urban investment is a company, and the company was invented for bankruptcy.

Many friends may feel quite scary, so much money is borrowed out, and if it goes bankrupt, it will not be repaid? What about the person who lends the money?

There is nothing to do, remember the lesson, and don't lend it casually next time.

Let's think about it, why did the country not allow local governments to borrow money from banks at the beginning? It is to prevent them from borrowing too much.

This is like you have a friend who is unreliable, you know he may not be able to repay the money, and you still lend it, and he will not repay the money in the future, you tell others that you are very aggrieved, how many people will sympathize with you?

In addition, why are there so many financial institutions willing to lend money to those very unreasonable, obviously not repayable projects? They are looking at the high returns, and they will definitely repay it in the future. So saying "rigid redemption" will encourage irresponsible behavior, you invest and make money, you spend it happily by yourself; you invest and lose money, others bear the consequences, where in the world is there such a good thing?

Now the problem is the same, everyone should not think that I am here to be a scholar, there will be urban investment companies that will go bankrupt directly in the future, remember the "implicit guarantee" of the government to "urban investment" I mentioned above? Why is it implicit? Because the law does not allow explicit guarantees, just for the day when it comes and there is a law to follow.

In fact, a few days ago, the Minister of Finance, Liu Kun, said in an interview that he adheres to the principle of not rescuing the central government, "whose child is taken away by whom". Break the government's bottom line expectations, promote the market-oriented transformation of financing platform companies in a classified manner, and promote the formation of clear boundaries between government and enterprises.What does this string of "jargon" mean? It's not complicated, marketization and legalization, which means if you can't pay back the money, go to court and go through the bankruptcy process. After bankruptcy, take an inventory of the company's desks and chairs, and pay back as much as you can. As for those creditors who lose their bottoms, they can only accept the loss, and don't make such low-level mistakes next time.

This is somewhat similar to the bankruptcy system in the United States. I couldn't understand before why you can't pay it back and you don't have to pay it back. Those who lend money deserve to be the victims, right?

Later, I understood that the only one who can be responsible for your money is yourself. If you firmly do not lend, can others point a gun at your head to lend money? Since you lent it out voluntarily, and the other party can't pay it back, then you can only accept the loss, and be more careful next time. If you lend money casually and can't get it back in the end, the country will back you up, which is equivalent to the taxpayers paying, which means you take the benefits, and others bear the consequences when something goes wrong, which is simply outrageous.

This statement is cruel, but if you think about it, which thing in our life doesn't operate like this? Apart from your parents, who else will back you up for anything?

Of course, there won't be a large-scale uncontrollable bankruptcy, after all, the city investment owes a lot of money, and most of them still have assets. Although most of the attractions are not profitable, there are still many that are indeed profitable, and they can make money slowly and pay back slowly.

But there will definitely be a batch of bankruptcies, breaking the superstition that investing in government projects will not lose money, because this superstition itself is too harmful to society.

This will allow local governments to make some unreasonable investments, and then the public and financial institutions will blindly put money in, and finally the project will be a mess, with no value, and the central government will use taxpayers' money to clean up the mess. This kind of thing can be done occasionally, but if it happens often, it will definitely cause trouble. The problem we are facing now is that we have learned nothing from past mistakes, what should we do? It can only be to let everyone suffer a few losses, and after suffering losses, they will naturally be more careful next time. This is somewhat similar to buying that kind of P2P financial product, and not suffering losses will not change the bad habit of being greedy for cheap.

Moreover, the country has been emphasizing one thing since 2017, called "breaking the rigid redemption," which means that in addition to putting money in large banks as deposits, other investments are risky and may lose the principal. In fact, there is a risk in deposits, but it is relatively small.

This policy seems cruel, but in the long run, it is not a bad thing. The public should have this awareness and realize this as soon as possible, invest less, and maybe they can still protect the principal.

Speaking of this, it is actually only the most serious part, in fact, most of the debts will not reach the point of bankruptcy. This also leads to the second solution, the debtors bear the responsibility.I previously wrote an article titled "National Bankruptcy, Is There a Cure?", in which I discussed the differences between internal and external debt.

Internal debt is the money borrowed from banks and financial institutions by the government and state-owned enterprises, while external debt is the money owed to other countries. Generally speaking, external debt must be repaid; it is due when the contract expires. Once you admit that you cannot repay it, no one will lend you money anymore, and the consequences are very serious.

This is because almost every country relies on the international market. You need oil from the Middle East, industrial products from China, power equipment, mining equipment, mobile phones, computers, etc., which you cannot produce by yourself, right? So you have to grit your teeth and repay it. This process is very painful. Not long ago, Sri Lanka experienced this situation. The country ran out of foreign exchange and could not repay the creditors, and water, electricity, and oil were all cut off, almost causing a national riot.

Internal debt is different. The debts are owed to domestic banks, and there is nothing that cannot be negotiated. For example, Zunyi Road and Bridge, although it seems that this company will not be able to repay so much money in the next life, but in case the Zunyi government finds a new source of income in a few years and earns money, it may be able to repay these debts.

Or in a few more years, if the economy of the eastern provinces recovers and increases the transfer to the western regions, and the western regions save a bit and spend less, it is also possible to repay some every year. Even if it cannot be repaid in the next life, as long as the interest is paid, it is not completely hopeless.

This time, the negotiation is to repay in 20 years, with the first ten years paying interest and the last ten years paying the principal. The essence is that the creditor and the debtor have reached an agreement to share the costs, but the wise can see that the creditor will bear the majority in the future.

So, if there is a debt crisis, it is likely that some will go bankrupt, and some will negotiate with the banks to repay slowly in the future.

Can you dilute the debt by releasing water? Of course, this is the third solution to the debt problem, which is to let others bear it.

Many countries are doing this, but there is a problem with this, a very big problem, which will destroy people's expectations for the future.

Diluting debt through inflation is actually diluting the debt by devaluing the money that people have in the bank. This seems very clever, but it has endless after-effects.It's a simple truth: why do you deposit money in a bank? Because you're preparing to spend it when you're old. What if I tell you that the currency will depreciate by 10% each year for the next decade? Would you still dare to deposit it? In fact, the essence of inflation is that whoever saves money bears the cost, and whoever borrows money enjoys the benefits. The richest people are the ones who owe the most money, while the poor have no security and have to save a little bit, only to subsidize the rich in the end.

The traditional virtues of the Chinese nation are completely ruined. No one dares to save money, and everyone wants to be in debt. At that time, everyone will realize what consumerism is.

Then it will become a fool who saves money, and the smart person will change the money into assets that cannot be inflated as soon as they get it, such as buying a house in a core location, or directly changing it into foreign currency. Anyway, the currency is immediately handed over as soon as it is received because it depreciates in hand. At that time, our currency is not even wanted by our own people, so how can we internationalize it? Moreover, no one in society dares to save money. Let's think about it, how terrible is such a society?

This is also why our country is extremely sensitive to inflation. Of course, the United States is also sensitive. This time, it has made the whole world in turmoil, isn't it because of inflation?

So, moderate inflation is acceptable, but trying to get rid of debt through inflation comes at too high a cost. Chairman Jiang, the Weimar Republic, and Venezuela have all done this, and everyone knows the results. That is to say, relying on inflation to dilute debt requires tremendous courage, the courage to destroy the expectations of the entire society, and most normal countries can't do it.

So in reality, countries deal with debt by combining these three methods.

Some can be allowed to go bankrupt directly if they are too outrageous. Local governments and creditors will learn a lesson and know not to engage in those non-mainstream projects in the future. The cost is that these local governments may never be able to borrow money again.

In addition, we can't have vicious inflation every year, can we? Moderate inflation is always possible, right? Inflation is inevitable, and generally, countries will maintain a moderate inflation, which will not overly dilute everyone's savings and can stimulate everyone to consume, except for the Japanese, who are impervious to it. I won't say much about this, everyone naturally understands.

The rest can be integrated into the national debt and repaid slowly. Here we need to talk about it, national debt and personal debt are completely different things.

Let me give you an example. A rich person, he owes a lot of money, and his assets are not enough to cover his debts. Should he sell his assets and actively repay his debts, or should he buy a luxury car for the New Year and try to show off his wealth?Of course, it's the latter, because that way you can buy yourself some time, continuously borrowing new to repay the old. Once everyone realizes you might not be able to repay your debts, they all come to your house to demand money, and they won't leave without it. Moreover, no one dares to lend you money, and the projects you are running also fail. You might have been able to repay the money in a few months, but you are directly squeezed to death.

For a country, the logic is the same, except you can skip the "showing off wealth" step, after all, holding the printing press, no one doubts that the country will not be able to repay the money.

It's easy then, you can borrow new to repay the old, everyone should pay attention, continuously borrowing new to repay the old, in fact, it is not repaying the money but only paying the interest, carefully feel whether it is. The Dutch were the first to discover this, simply not repaying the money, and turned it into perpetual debt.

If you still don't understand, let me explain it to you. You lend the government one million, and the government gives you an IOU, promising that you can receive 40,000 a year with this note. One day, if you want to change it into money, the government won't change it for you, you go to the vegetable market and shout a few times to ask who wants it, someone gives you one million and buys the note, he takes the note to the government to receive 40,000 every year, and when he needs money in the future, he can also sell this note. This is perpetual debt, the government does not repay the money, only pays the interest, as long as everyone believes that the government will continue to pay the interest, that note can be sold back and forth.

The Netherlands is so small, but it has won against the European powers in succession, becoming a leading power, what is it relying on? Isn't it borrowing money, playing credit to the extreme? Later, the Glorious Revolution "possessed" the UK, and the Dutch upper echelons became the British upper echelons overnight, and then passed it on to the British, the British continued to go wild, followed by the Americans, the routine is almost the same, basically the Dutch set, always borrowing and always repaying, cultivating strong credit, borrowing other people's money, doing their own things; borrowing your money, building my ship, and finally knocking you down. The United States is now also borrowing money from the world to build aircraft carriers, the same thing.

You may wonder, is there such a good thing, can the government borrow money indefinitely?

Of course not, it would become a Ponzi scheme, and it will collapse sooner or later.

The boundary of government borrowing is whether it can afford the interest. Generally speaking, apart from various public expenditures, the remaining money can be used as interest to borrow debt.

The debt-to-GDP ratio of the United States and Japan is much higher than ours, also because their interest rates are low, and the interest paid every year is relatively small.

But doing this itself is like dancing on a tightrope. Even with basic common sense in life, you know that the scariest thing about debt is that the more you owe, the more out of control it becomes, and finally you fall into a pit and can't get out. The key is that in the absence of money, it is easiest to make short-sighted operations, and then get deeper and deeper. In this regard, the country is similar to ordinary people.It is precisely because as long as you can continue to pay the interest, you can keep borrowing, borrowing while repaying, never defaulting, that more and more people are willing to lend to you.

This is also why at the beginning of the United States' founding, Hamilton realized that being in debt is not a bad thing for a country; it is actually an asset. Just pay it back slowly, and if you pay seriously, you can borrow more money. In the future, you might even be able to issue perpetual bonds that don't need to be repaid.

Nowadays, one of the most important pillars of American hegemony is U.S. debt. In fact, U.S. debt is not really intended to be repaid. It has been borrowing new to repay old for two hundred years without defaulting, with a credit rating that is unrivaled, which is why it can borrow money from all over the world at such low interest rates. However, if it continues to expand and reaches a point where it can't even pay the interest, it will eventually collapse. Of course, the United States is also aware of this.

So, if it can be managed well, controlled at a good pace, not deteriorating, not getting more and more in debt, and kept within an appropriate range, debt is not a bad thing for a country. It's like your family earning 10 units a year and having a mortgage of 1.8 million; it's okay, just pay it back slowly. But if you have a loan of 5 million, you're in trouble, and it's highly likely that something will go wrong.

The same applies to a country. China's current debt-to-GDP ratio is close to 1:1, which is not high compared to developed countries, but it has been increasing rapidly in recent years. If it can control the growth, there's no problem. For example, if you carefully choose a site, borrow money to build a hydropower station, and the future benefits repay the principal and interest smoothly, it is definitely the right thing to do. However, if you borrow money to build a resort in the mountains where no one goes, that money is as good as dead, becoming a cost, and let's see who will bear it in the future. If the growth of debt cannot be controlled, soon the part of GDP growth every year will not be enough to pay the interest.

So, debt itself is not terrible, having some debt is good. The government just needs to avoid such investments continuously rising and avoid the debt from continuously deteriorating. With the current scale of our country's debt, there's nothing to worry about, just don't continue to expand it without limit.

The end of the article. If you think it's well written, please give a like and thank you for reading.