China’s Property Crisis: Is the Global Economy in Danger?

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 rolled out a “three red lines” policy aimed at cautiously deflating a massive, decades-old housing bubble.

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.

Xi Jinping watches before meeting in Beijing
Chinese President Xi Jinping is trying to curb China’s real estate sector, saying that “housing is for living, not for speculation.” [File: Lintao Zhang/Reuters]

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, protests involving some 300 homeowner groups have spread to nearly 100 cities across the country.

Deutsche Bank estimates that the value of boycott-affected mortgages will reach RMB 1.8 trillion to RMB 2 trillion ($270 billion to $300 billion), or about 5% of all mortgages.

Tommy Wu, chief economist at Oxford Economics, said: “The crux of the problem is that property developers cannot afford to have enough cash to keep projects going due to debt service costs, slowing home sales and misuse of funds. Don’t have flow,” he said. Watch out 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 China’s property crisis lead to the collapse of the global economy?

China’s real estate crisis poses a significant risk to an already strained Chinese economy due to Beijing’s stringent ‘no-coronavirus’ policy and a slowdown in the global economy. By 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 would 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’s under water right now,” Wu said. “If we continue at the current pace, I think it will be unsustainable.

China’s economy accounts for almost one-fifth of the world’s GDP, so any significant slowdown would mean a major impact on the global economy.

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. More likely is a prolonged recession that will drag down global economic growth over the next few years.

Wu said Chinese policymakers have tools not readily available in more capitalist countries to stem 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 Wu said China could still be looking ahead to years of economic stagnation, which would feel like a recession for many Chinese after decades of strong growth. rice field.

“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 to solve 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.

Beijing has also taken steps to boost the economy more generally, including cutting interest rates and rolling out stimulus packages, and last week released 300 billion yuan ($44 billion) of new credit through its state-owned policy bank. 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.”

Still, China’s efforts to prop up the market may be limited. The Chinese government is widely expected to adhere to the “three red lines” and Chinese President Xi Jinping’s mantra that “homes are for living, not for speculation.”

Mr Wu said Chinese policymakers now face a dilemma: 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 interests,” Wu said. It’s also politically embarrassing, which is why I think the policy is relatively lackluster, and we haven’t seen the kind of housing bailout that many investors were hoping for.”

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