China’s property market is in the midst of a slow crisis.
Property prices are plummeting as authorities try to curb unsustainable debt and market speculation. Hundreds of thousands of homebuyers are refusing to make mortgage payments on sold properties as developers struggle to complete housing projects on time.
With real estate accounting for 15-30% of China’s Gross Domestic Product (GDP), market woes are affecting the world’s second largest economy, as well as its global growth potential.
Why is China’s property market in crisis?
China’s property problems are, in part, the result of careful policy decisions. In August 2020, Beijing “Three lines” policy It was meant to carefully deflate the giant housing bubble that had formed over the decades.
This policy had two goals. Alleviating the economy’s overreliance on real estate and curbing the speculation that has kept house prices out of reach for many middle-class Chinese.
Under this policy, developers had to meet strict standards of financial soundness, including a 100% net debt to equity cap, in order to borrow from banks and other financial institutions.
It turns out that many developers were operating far outside the “three red lines” and were in huge debt. With the sudden inability to borrow under the new rules, the sector faced severe funding shortfalls.
In December, Evergrande, one of China’s largest developers, defaulted on interest payments by offshore bondholders, followed closely by Kaisa Group Holdings.
Property prices fell for the 11th straight month in July, down 30% from last year.
“What China is going through right now is a policy-induced crisis,” Gabriel Wildau, managing director of risk analysis firm Teneo, told Al Jazeera.
“I mean, people have been warning about the housing bubble for years, and for good reason, but the serious stress facing the market right now is the lack of financing for developers. It is a direct result of the very stringent restrictions on people, imposed about a year and a half ago.
Since then, problems in the sector have worsened as underfunded developers struggle to complete projects on schedule.
After beginning in the southeastern city of Jingdezhen earlier this year, the protest by pre-sale property buyers has spread to nearly 100 cities and has grown to involve about 300 homeowner groups.
Deutsche Bank estimates the value of boycott-affected mortgages to reach CNY1.8 trillion to CNY2 trillion ($270 billion to $300 billion), or about 5% of all mortgages.
“The crux of the problem is that property developers don’t have enough cash flow to keep their projects going,” said Tommy Wu, chief economist at Oxford Economics, in a note earlier this month.
“Resolving this issue will help rebuild homebuyers’ confidence in developers, which will help support home sales and, in turn, improve the financial health of developers.”
Could this cause a global economic collapse?
China’s property problems pose great risks to the economy, China already under tension due to government’s tough ‘zero coronavirus’ policy and global economic slowdownBy some estimates, real estate accounts for 30% of GDP, about twice the equivalent share in the United States.
Some analysts believe the market has bottomed out, but the sector’s woes are expected to continue for some time. In July, S&P Global Ratings predicted that property prices will fall 30% this year. This is a deeper decline than during the 2008 financial crisis.
“It’s just a huge part of the economy that is currently under the surface,” said Teneo’s Wildau. “If we continue at the current pace, I think it will be unsustainable.
The global economy is not considered at high risk of a financial crisis like the one caused by the collapse of Lehman Brothers in the United States because Chinese property developers hold relatively small amounts of foreign debt, he said. CEO Alicia Garcia Herrero said. Asia Pacific Economist at Natixis in Hong Kong.
However, the size of China’s economy, which accounts for almost one-fifth of global GDP, means that a significant slowdown could still have a severe impact on global growth.
“The global impact will be primarily due to China’s very low growth, and not the financial impact,” Garcia Herrero told Al Jazeera.
“Of course, if Chinese banks eventually can’t swallow this shock, bad debts increase significantly, and there is a financial crisis in China, I don’t think it will happen anytime soon, but Japan in the 80s. It’s going to be like the 90s, so we’re stuck with bad loans, bad credit, a very bad economy, deflation, I think that’s the scenario, so it’s not an immediate Lehman-type event. .”
The World Economic Forum estimates that for every 1 percentage point drop in China’s GDP, global GDP drops by 0.3%.
In a 2019 study by the US Federal Reserve, economists estimated that if China’s GDP fell by 8.5%, it would fall by 3.25% in advanced economies and nearly 6% in emerging economies.
The Chinese economy is unlikely to suffer such a severe economic collapse. However, analysts say we could be headed for a prolonged recession that drags down global growth in the coming years.
Teneo’s Wildau said Chinese policymakers have tools not readily available in more capitalist countries to avoid a full-blown financial crisis.
“Chinese leaders have far more control over the financial system and real economy than U.S. policymakers did in 2008. So they have the tools to avoid a deep crisis.” he said.
“They have the means to stem the financial spillover and the complete collapse of credit flows simply by ordering banks to lend. You can preserve your sexuality and avoid a chaotic chain of defaults.”
But Wildau said China could be looking ahead to years of economic stagnation, which for many Chinese will feel like a recession after decades of strong growth. Stated.
“Even without a severe financial crisis or market panic, we could still see a long period of low growth. This is like the scenario for Japan: years of sorts of severe slowdown,” he said. I was.
What is China doing about the crisis?
Despite its determination to make the economy less dependent on the property sector, the Chinese government has indicated that supporting the property market is a key task.
At a meeting of China’s top decision-making bodies in July, officials said the property market needed to be “stabilized,” stressing that local governments should be responsible for ensuring the completion of second-hand homes.
Earlier this month, Chinese news outlet Caixin reported that Beijing was preparing to issue 200 billion yuan ($29.3 billion) in loans to complete unfinished housing projects.
The Chinese government has also taken steps to boost the economy more generally, including cutting interest rates and rolling out stimulus packages, releasing 300 billion yuan ($44 billion) of new loans through its state-owned policy bank last week. Announced.
“We hope that additional funds will be arranged to help complete the unfinished housing,” Wu, an economist at Oxford Economics, said in a note.
“Indeed, statements from the Politburo meeting in July underscored the need to stabilize the property market and secure housing supply. Instead, authorities may ask local governments, banks and property developers to coordinate unfinished housing projects to ensure completion.”
China’s efforts to prop up the market may eventually be constrained, with the Chinese government embracing the “three red lines” and Chinese President Xi Jinping’s “Homes are for living, not for speculation.” It is widely expected to adhere to the mantra of “not for
Mr. Wildau said Chinese policy makers now face a dilemma: to crack down on property or shift course for growth.
“If they were to embark on a bailout now, it would be set back and set back those gains,” he said.
“It is also politically embarrassing because it seems to reverse or admit to error. That is why I think the policy is relatively lackluster. I didn’t see any housing relief like there was.”