Analysts are beginning to worry that China’s property crisis may be slipping out of control. If it does, the effects could rapidly reverberate throughout the world’s economies.
China’s rapid financial growth has been, in part , fueled by a real estate boom which saw developers taking ever larger financing packages, and using them to generate properties which until now, there was no doubt would be sold at a profit, allowing the cycle to continue and expand. As this machine continued to produce jobs and profits, that fueled an economic boom which allowed China’s economy to rapidly expand to meet what was an ever growing demand for their cheaply produced products throughout the globe.
But now that real estate market, which has fueled Chinas rapid growth going back to the 2008 financial crisis, has entered a decline, which has seen prices falling for 11 straight months. If China’s real estate sector collapses, the effects will rapidly spread through the entire global economy and every company which relies on Chinese products for its supply chain.
In China, according to China’s National Bureau of Statistics, new home prices, excluding state subsidized housing, declined in 70 cities in July by just over 0.1% from the previous month. By way of contrast, in the US the S&P CoreLogic Case-Shiller U.S. National Home Price Index rose 1% month on month in May, in the latest figures available. Even though analysts predict there will be a coming correction in overheated markets like Austin, that still highlights the dangers in China.
On Monday in the state-run publication Global Times, Yan Yuejin, research director at a Shanghai-based housing market think tank said, “There is an urgent need for active policies around the country to stimulate a market recovery.”
In China, banking was structured so consumers would receive virtually no interest on bank deposits, which would discourage simple saving, and their money was subject to very strict cross-border capital controls to dissuade them from investing outside of China. This has left the population with little investing options for years, other than to dive into the housing market, which as a result of everyone being forced into it, boomed and became a vehicle for rapidly growing family wealth. In China, you invested everything you had into purchasing the nicest home possible for your family, and then sold and upgraded as soon as you had any measurable amount of savings or ability to borrow. Combined with low borrowing rates, this was part of what fueled China’s property boom.
Because of this credit-induced boom, Goldman Sachs, in 2019, famously estimated that the country’s residential real-estate market was worth $52 trillion, which was twice as big as the United States’ residential real estate market.
As President Xi Jinping heads toward his unprecedented third reelection in the fall however, signs of strain are beginning to emerge. China’s largest developers are all beginning to show signs of financial distress. China’s most indebted company, the real estate developer Evergrande, defaulted on its debt last year and is undergoing reorganization. Meanwhile, rival developers Kaisa Group, Country Garden, Sunac China, and Shimao Group are all also showing signs of having over-leveraged, and being in various degrees of financial trouble.
Adding to the woes, China is now seeing waves of debt boycotts. This began with purchasers of homes, which were not being constructed due to developers experiencing financial distress, announcing they were not paying their mortgage payments if they were not getting the houses they used the mortgage to buy. This then spread to contractors employed by the developers, who announced they were not going to pay back loans they had taken out, to pay for jobs they were hired by the developers to do, until the real estate developers paid them for the jobs.
This meant depositor funds at the bank, which were given to these home buyers and contractors, have been ultimately passed on to the developers, who now appear at risk of collapsing, and taking those depositor funds with them. Even the banking sector, having seen its depositor funds invested in the real estate boom, now could lose those funds in a real estate collapse.
The real estate sector has seen at least $90 billion wiped off its stocks and bonds since the beginning of the year, according to Bloomberg data.
Even worse, China now appears to be in the throes of a new outbreak of Covid-19, and President Xi is showing no signs of deviating from his strict, “Zero Covid” policies which shut down entire cities, regardless of economic effects, at the first hint of an outbreak.
That, combined with rising tension over Taiwan’s independence, are all threatening to be the final deathblow that sets off a Chinese economic crisis.
In a surprise move to try and spur some growth and alleviate the strain, China’s central bank dropped two key interest rates on Monday. Whether that will help spur demand, or panic investors with the thought of what China’s government knows, will remain to be seen.
In a worrisome sign, Hong Kong’s daily South China Morning Post, which belongs to Alibaba, penned a warning that China’s real estate market was sitting on 50 million vacant apartments purchased by speculators, which could flood the market at any moment. The article referred to the prospect as a “ticking time bomb.” Obviously such a speculatory threat is one of the risks you run, when the government artificially encourages the entire nation to invest all of its money in real estate.
