China’s property crisis could hit the economy harder: report

According to media reports, China’s property slump is affecting both banks and local governments, and threatens to have a bigger impact on the world’s second largest economy.

Defaults have surged in the past 12 months after property developers’ debt-fueled growth model was reversed, according to Nikkei Asia. According to Shanghai-based Wind Information, there were about 99 domestic debt defaults during the year, including payment delays.

It should be noted that China’s factory inflation rate in July reached its lowest level since February last year, according to the National Bureau of Statistics. The country’s producer price index, which measures factory prices, rose 4.2% year-on-year in July, following a 6.1% rise from the previous month, China Daily reported, citing NBS.

S&P Global Ratings previously warned that around 20% of the Chinese developers it rated were at risk of bankruptcy. The Chinese government sparked this reversal by imposing tighter restrictions on access to mortgages and developer financing in 2021.

A complete lockdown in major cities amid China’s zero COVID policy has weighed on the country’s economy with rising inflation and disruptions to global supply chains.

China refuses to admit it, but the country’s rigorous eradication of COVID-19 is starting to affect large businesses and industries that have shut down operations in Shanghai and other cities, Hong Kong says. The Post reported.

Meanwhile, new home sales fell 27% year-on-year from January to June. His July sales in China’s top 100 cities were down 13% from his June and 27% from the same period last year, according to property research firm China Index Academy, cited by Nikkie Asia.

Banks are starting to feel the heat. Loans to the real estate sector accounted for 26% of total outstanding lending in China, compared to about 21% to 22% in Japan at the height of the real estate bubble. The proportion of non-performing loans held by China’s four largest state-owned banks will increase by more than one percentage point to 3.8% in 2021.

Several housing developers have canceled ongoing condominium construction projects due to the inability to secure cash. According to Nikkie Asia, Yan Yuejin of his Shanghai-based E-house China R&D Institute estimates that about 4% of new builds sold in his four years through June 2022 had problems. doing.

On the other hand, local governments themselves do not have a solid financial base.

With tax cuts straining revenues, local governments have become heavily dependent on revenue from the sale of state land use rights to developers. Data dating back to 2010 show that land sales exceeded tax revenues in 2020 for the first time.

But cash-strapped developers cannot afford new residential land. Local government land revenues are expected to fall by 31 per cent in the first half of 2022, and for the full year he is expected to fall for the first time in seven years. The pressure on the industry has also hit income from property taxes.

S&P Global estimates that 30% of local governments could be in financial trouble at the end of the year, requiring corrective measures such as spending cuts.

Over the past two decades, real estate has been a major driver of China’s economy.

According to Harvard University professor Kenneth Rogoff, real estate and related businesses accounted for about 29% of the country’s gross domestic product, compared with less than 10% at the end of the 1990s.

(Only the headlines and photos in this report may have been modified by Business Standard staff. The rest of the content is auto-generated from syndicated feeds.)

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