For the longest time, approximately the past 20-25 years, China has seen unprecedented growth in its economy and strength to be known as a powerhouse not only in Asia but across the globe. So much so that major economies have united in their fight against containing the Chinese growth that also fuels its aggression. Even in the covid period while the world collectively saw huge losses of life and economy, China appeared to have majorly remained unaffected on both counts. However, now we are seeing the dominos fall one after the other. Chinese real estate has been one of its biggest strength and growth drivers. However, it is now seeing not only stagnation but also a potentially total collapse. The news of the distress in Chinese real estate sent shivers to its economy as a whole and what the world saw was an open dissent of the Chinese Communist Government on a huge scale which is quite frankly, extremely rare.
So what is exactly the real estate crisis in China and do we have to worry about it back home? Given below are the answers to these questions and more.
What is the property crisis in China?
The year 2022 saw many hits for the Chinese economy in the form of droughts and restlessness in the real estate of the country. Hundreds of Chinese citizens started sending angry messages to their banks, government authorities, and mainly the Chinese developers stating that they will stop paying their mortgages if they stop construction. Such threats have been made against more than 300 property developments across the country. Posts relating to the same have also briefly appeared on Chinese social media before being censored as per the state policy. This extreme reaction was on account of the stalled constructions across many projects where citizens have poured in their hard-earned money but are not getting any returns.
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Real estate is one of the biggest GDP drivers of the Chinese economy, accounting for almost 23% at one point. Real estate is seen as one of the main sources of investment in Chinese culture and also as a status symbol. The growing urbanization and rapid industrialization also led to increasing in demand for houses in the urban spaces which led to the real estate boom. Developers took cheap loans and were churning out development projects at record speed.
In India, when you purchase a house property you have to pay a percentage of the property as a down payment and the rest over a course of a period. However, in China, the apartments and development projects were fully pre-sold which fueled the construction at a rapid pace. These houses were purchased for speculative purposes and not for actual living and this was the reason behind driving the demand for houses. The growing demand further pushed the developers to construct more buildings at breakneck speed with the backing of easy credit thereby piling up huge and unsustainable debts.
The government has been aiming a crackdown on the real estate sector for quite some time now due to the risks of the property-fueled economic growth, President Xi Jinping saying repeatedly that ‘houses are built to be inhabited, not for speculation ‘. The Chinese Government thus came out with a ‘three red lines’ policy in 2020 which laid out the framework for evaluating the debt levels of the developers.
Any developer exceeding the set benchmark would face stringent restrictions in getting access to further credit. This would have worked for the government had there been no zero covid policy but the result was that it opened a can of worms for the real estate sector. Many of China’s biggest developers had crossed these benchmarks and now had to rebalance their balance sheets leaving them short of cash to continue their developmental projects.
Evergrande default and its consequences
The real estate boom had placed Evergrande Group to be the poster child of this sector in the country. It had become the largest real estate developer amassing huge debts along the way. The real estate crackdown of the Chinese Government led to further distress on the company in the wake of decreasing demand for its lavish properties. The group could no longer borrow as it used to due to the ‘three red lines’ policy and thus began selling off its diverse business streams to keep the money flowing. However, this was not enough.
Evergrande Group failed to make payments to its international stakeholders and officially entered the default list. This default immediately sent triggers to the entire sector leading to government intervention. The Chinese government chalked out a plan for restoring the solvency of the company and delaying the total collapse of the real estate giant. However, the crisis is not yet fully averted as Evergrande Group missed its July 2022 deadline for releasing a plan for the reconstruction of debts.
What is China doing about it?
The default of the Evergrande Group was the tip of the iceberg for the Chinese real estate sector as other major developers have also hit roadblocks in their ability to get more credit domestically or internationally due to the well-publicized Evergrande debacle. As they are unable to get credit for completing their ongoing projects, homeowners who have already paid for these properties are not getting their dues as promised. This has led to widespread protests and the stopping of mortgage payments further crippling the banks from getting any funds. Also, a drop in new real estate sales fearing liquidity crisis further cripples the developers from accessing any inflows.
The government has for now broadly allowed the boycotters to withhold or put a pause on their mortgage payments without facing any penalties. On the other hand, the Chinese Government is also helping the real estate developers come out of this mess by assisting them in speeding up the task to finish their projects. The Chinese State has appointed local governments to oversee this work and they may also be charged with buying these properties and finishing them. However, this may be easier said than done as the local governments are already in debt due to the zero covid policy of the country. This has prompted the Chinese government to issue a kind of bailout of approximately US$ 30 billion in loans but this may be grossly insufficient. The demand for real estate has reduced by almost half in 2022 and many major developers are expected to default in the coming months.
Conclusion
The real estate crisis in China has reminded the world of the Lehman Brothers crisis that shook the world. Most experts believe that the impact of the Chinese real estate debacle will be muted as compared to the shivers that the former sent across the globe as the Chinese property developers hold relatively small overseas debt. However, as China accounts for almost 1/5th of the global GDP, an economic slowdown in the country is likely to trickle down on the global platform as well.
According to the World Economic Forum, every 1% drop in China’s GDP will result in a 0.3% drop in global GDP. While the world does not see a 2008 type of situation repeating in this scenario, as the Chinese Government has much better control of its financial system and economy than the US had, deflation and stagnation are what the country might be facing.
FAQs
No, this US$ 30 billion in the form of loans as well as other measures like a reduction in interest and another US$ 44 billion in the form of new credit from state-run policy banks may not be sufficient to successfully clear the real estate crisis of the country.
Most experts believe that the Chinese real estate sector will bring a definite economic slowdown in the country but the likelihood of it triggering a global recession like 2008 is less. It could be a contributing factor nonetheless as major economies in the world are dealing with energy and food crisis on their own, leading to recession-like conditions.
The Chinese government is unlikely to directly issue a bailout to property developers but has routed the same in the form of loans from loc state-run policy banks and tasked the local governments to ensure the completion of ongoing projects.
In the wake of the growing dissent, the Chinese government has largely allowed homebuyers to pause their mortgage payments without any penalties for now. Further directions from the government are awaited by millions of such aggrieved homeowners.
