Author: Carlos Prego

Source: Xataka

China has a flair for hyperbole. When it comes to constructing large infrastructures and, regrettably, also when discussing economic crises, it tends to go big. This is evident in its real estate sector, which is now being battered by a storm affecting developers, banks, families, institutions, and by extension, the world’s second-largest economy. The crisis is so profound and worthy of China’s immense scale that some fear it could be “the largest real estate collapse ever seen.”

What we are witnessing are alarming yet uncommon scenes in the Asian giant, a country traditionally resistant to dissent. In recent months, protests and desperate attempts by authorities and developers to alleviate the crisis have been frequent.

What Is China Facing?

China is dealing with a substantial real estate crisis. After decades of prosperity, during which the sector drove the country’s economy, the market is now experiencing turbulent times. Easy credit from the past has vanished, prices are falling, buyers are refusing to continue paying mortgages for partially completed apartments, and sales have plummeted by 40% compared to 2021. The scenario is affecting developers, but also local agencies, which previously relied on land sales as a lucrative revenue stream.

“There has been a complete collapse of confidence in the real estate market. No industry can survive that,” explains Gabriel Wildau, an expert at the firm Teneo, to The Guardian. The impact extends beyond developers, credit institutions, and commercial entities. The real estate sector is estimated to represent around a third of the giant’s economy, a significant percentage covering everything from housing to rental services, intermediaries, materials, and appliances.

What Are the Causes?

The crisis is fueled by a complex cocktail of factors, with two main “ingredients” standing out: the policies adopted by the Chinese government and the characteristics of its real estate market. In this market, it is common for 70% to 80% of purchases to be made off-plan, creating a flow that developers use to finance projects.

Two years ago, the government decided to adopt drastic measures to control the real estate bubble that had been inflating for decades and to limit loans to developers. These measures were based on “three red lines” that the sector had to comply with, setting clear limits on debt, leverage, and liquidity.

One of the first companies to feel the impact was Evergrande, the country’s largest developer, whose crisis triggered a domino effect throughout the sector. The result: incomplete projects, empty homes, and, most importantly, a severe blow to confidence in the real estate sector. BBC estimates that around thirty real estate firms have stopped paying their external debt. ANZ estimates that there are over $220 billion in loans linked to unfinished projects.

What Are We Seeing?

We are witnessing highly unusual scenes in China. Some of these, if the situation weren’t so serious, might even be deemed delusional. Perhaps the most symptomatic are the protests from buyers refusing to continue paying mortgages for apartments purchased off-plan and still incomplete. Consultancy S&P Global estimates that loans tied to these protests amount to around $145 billion, a figure that other analysts consider conservative.

The real estate crisis is also manifesting in other ways. In a desperate attempt to boost sales—detailed by Business Insider—some cities are promoting group purchases, officials are actively encouraging buying, and some firms, in their desperation, have even accepted crops as down payments for properties in rural areas. The government has also intervened, recently launching a 300 billion yuan ($43.6 billion) infrastructure spending package and a fund for local governments.

What Do the Numbers Say?

The sector is not faring well. Data from August from China’s National Bureau of Statistics show a 6.4% decline in investment in real estate development during the first seven months of the year, with a 12.3% year-on-year drop in July alone. Initiated projects are also falling, with a year-on-year drop of just over 45%, and bank loans to developers have decreased by 36.8%.

What Is the Background?

The backdrop certainly does not help. China is facing a complex scenario marked by the economic ramifications of the Ukraine war, the consequences of a historic drought, and the aftermath of its stringent “Zero COVID” policy, which is now taking a toll on the giant’s economy. In the last quarter, the country grew by only 0.4%, below expectations, and some believe it may end the year at zero growth.

Beyond the economic factors, China is also facing demographic changes that could impact domestic demand and is approaching a crucial political event at the end of the year: a congress where Xi Jinping is expected to seek a new mandate. At this point, The Guardian details, it seems unlikely that the government will reverse the measures it has adopted to tackle the pandemic or adjust loan policies.

And Beyond China?

The situation is viewed with a certain, and undeniable, concern. The Asian giant is, after all, the world’s second-largest economy and has a significant impact on global GDP. Its economic troubles have repercussions for other countries. As Al Jazeera notes, the World Economic Forum estimates that each percentage point drop in China’s GDP equates to approximately a 0.3% decline in global GDP.