Clearing Triangular Debt Is Key to China's Recovery

China’s property slump will not stabilize until Beijing clears the inter-firm arrears that are blocking credit, working capital and domestic demand.

• The downturn has entered its sixth year, while repeated expectations of a market bottom since 2023 have failed as fiscal stress, wealth destruction and credit contraction compounded falling home prices and developer defaults.
• The PBoC reported in January 2023 that presale payments and payables to upstream and downstream firms represented 32% and 30% of Chinese developers’ liabilities, respectively, in 2022.
• Nomura estimates developer payables at about RMB25 trillion in 2025, with roughly 31%—RMB7.8 trillion—in arrears, more than twice the funding estimated to complete overdue presold homes.
• China Evergrande’s supplier trade credit reached RMB1 trillion, or 41% of total debt, while RMB326 billion of its commercial bills were overdue at the end of 2022.
• The authors point to the 1990s triangular-debt cleanup, when RMB52.8 billion of seed loans cleared RMB307.7 billion of trade debt between 1991 and 1993, a multiplier above 1:5.8; they also draw on Japan’s 2002 Takenaka Plan.

Takeaway: Beijing should audit and recognize bad debts, expand central debt swaps, recapitalize regional banks, buy distressed developer inventory and reform local-government finance, because time alone will not repair impaired balance sheets.