A new study published in Nature observed that stronger political connections in private listed real estate firms in China positively correlate with increased levels of excessive debt and heightened debt repayment pressures, culminating in an accumulation of credit risks.

The main reasons for private real estate companies’ excessive debt in order to expand investment are as follows.

First, politically connected enterprises are more likely to obtain financing and increase the book-free cash flow, while the over-investment theory believes that the increase in book-free cash flow means an increase of over-investment probability.

Second, real estate has always been an important growth point of the local government’s economy, “GDP doctrine” before the economic transformation and upgrading often makes local government require its associated real estate enterprises to expand investment more blindly.

Third, the professional knowledge of senior executives transferred from government departments is often lacking, and they are more likely to pursue short-term interests and over-invest. Eventually, excessive liabilities will be formed.