The property crisis in China, which has led to billions of dollars flowing out of the country, is not just Beijing’s own making but has also exposed the ‘reality’ of Beijing’s property boom, New York Times reported.
What started three years ago as a crackdown on risky business behaviour by home builders, and then an ensuing housing slowdown, has spiralled rapidly this month.
The broader economy has been threatened, and the confidence of consumers, businesses and investors has been undermined. So far, China’s typically hands-on policymakers have done little to ease anxieties and seem determined to reduce the country’s economic reliance on real estate.
“What is happening in the Chinese property market is really unprecedented,” NYT quoted Charles Chang, who heads corporate credit ratings for Greater China at Standard & Poor’s.
For the last three decades, China’s population surged and its people flocked to cities seeking economic opportunity. The developers couldn’t build modern apartments fast enough, and the property sector became the engine of a transforming economy.
Real estate employed millions and provided a store for household savings. Today, the property sector accounts for more than a quarter of all economic activity.
China’s dependence on real estate was lucrative during its strong phase when it seemed like a never-ending property boom, but today it has become a liability after years of excessive borrowing and overbuilding, as per NYT.
When China was growing faster, the excesses were papered over as developers borrowed more to pay off mounting debts. But now China is struggling to regain its footing after emerging from the “paralyzing pandemic lockdowns” its leaders imposed, and many of its economic problems are pointing back to real estate, NYT reported.
Today, Chinese consumers are spending less, in part because a slump in housing prices has affected their savings, much of which are tied up in property. Jobs tied to housing that were once abundant – construction, landscaping, painting – are also disappearing.
In addition to all this, the uncertainty of how far the crisis might spread is leaving companies and small businesses further afraid to spend.
Financial institutions known as trust companies, which invest billions of dollars on behalf of companies and rich individuals, are staring at losses from risky loans handed out to property firms, prompting protests from angry investors, NYT reported.
As per the New York Times, the current property crisis is a problem of the government’s own making.
The regulators allowed developers to gorge themselves on debt to finance a growth-at-all-costs strategy for decades. Then the government intervened suddenly and drastically in 2020 to prevent a housing bubble. It stopped the flow of cheap money to China’s biggest real estate companies, leaving many short on cash.
One after another, the companies began to crumble as they could not pay their bills. More than 50 Chinese property developers have defaulted or failed to make debt payments in the last three years, NYT reported citing credit ratings agency Standard & Poor’s.
The defaults have exposed the ‘reality’ of China’s property boom: the borrow-to-build model works only as long as prices keep going up.
However, even as the property crisis has worsened, Chinese policymakers have defied calls to step in with a major rescue package. Instead, they have opted for modest gestures like relaxing mortgage requirements and cutting interest rates.
NYT cited an editorial of the state-run Economic Daily, which stated on Friday that it would take time for recent policies to take effect: “We must be soberly aware that the process of defusing risk cannot be completed overnight, and the market must give it a certain amount of patience.”
The policymakers have tolerated the fallout of the real estate crackdown because even the companies that aren’t able to pay all their bills have continued to build and deliver apartments.
China Evergrande, for example, defaulted on 300 billion UYD of debt in 2021 and yet managed to finish and deliver 3,00,000 apartments out of the more than 1 million that it had taken money for but not completed at the time of its collapse, New York Times reported.
Evergrande filed for bankruptcy protection in the United States on Thursday.
However, a lot has changed in recent months. Households pulled back on big purchases, and apartment sales abruptly plummeted. This shock altered the fortunes of Country Garden, a real estate giant that was once put forward as a model by the government.
The company is now anticipating a loss of as much as 7.6 billion USD in the first half of the year and said that it is facing the “biggest challenge” to its business in its three-decade history, NYT reported.
Country Garden has just weeks to come up with the cash to make interest payments on some of its bonds or join its peers in default. It also has hundreds of billions of dollars in unpaid bills.
These developments have also concerned home buyers, who were already wary. In July, new home sales at China’s 100 biggest property developers fell 33 per cent from a year earlier, NYT reported citing the data from the China Real Estate Information Corp.
The sales also fell 28 per cent in June. The investors also worry that policymakers are not acting quickly enough to prevent a bigger crisis.
“I don’t think they have yet found the right solution to solve the problems,” NYT quoted Ting Lu, the chief China economist for Nomura.
Lu and his colleagues have also warned that falling home sales and defaulting developers risk a chain reaction that threatens the broader economy.
The fears have spread to other markets as well. In Hong Kong, where many of China’s biggest companies are listed, confidence has plunged so drastically that stocks have fallen into a bear market, down 21 per cent from their peak in January. Over the last two weeks, investors have pulled 7.5 billion USD out of Chinese stocks, NYT reported.
According to New York Times, real estate troubles are also spreading to China’s so-called shadow banking system of financial trust companies. These institutions offer investments with higher returns than standard bank deposits and often invest in real estate projects.
Earlier this month, the latest troubles have also surfaced. Two publicly traded Chinese companies warned that they had invested money with Zhongrong International Trust, which is managing about 85 billion USD in assets, and said that Zhongrong had failed to pay the companies what they were owed.
Meanwhile, videos have emerged showing a crowd of angry Chinese investors gathering outside the Beijing offices of Zhongrong demanding that the company “pay back the money” and calling for an explanation, NYT reported.
But it was not clear when the protest took place; videos of it were uploaded to Douyin, the Chinese version of TikTok, this month.
The demonstration was reminiscent of other acts of defiance in China rooted in the housing crisis. While such occurrences are rare, there are a few recent examples.
In February, thousands of retirees in Wuhan confronted officials to protest cuts in government-provided medical insurance for seniors. The cutbacks were a sign of the strain on local governments caused in part by the downturn in real estate that had hurt land sales, a reliable source of revenue.
Last year, hundreds of thousands of homeowners refused to pay mortgage loans on unfinished apartments. Some staged protest videos on social media, while collectives of homeowners tracked boycotts online.
Both protests drew notice, but the momentum petered out as the government intervened to limit discussion on social media while adopting some steps to ease tensions. Last week, a new video outside of Zhongrong’s offices showed no demonstrations but police cars and vans were parked in and near the facility, NYT reported.
