Why should we be interested in the real estate crisis in China?

Why should we be interested in the real estate crisis in China?

          Recently, the Chinese economy has been stagnating. The most recent quarter’s GDP was 0.4%. Many economists think China’s economy may not achieve its 5% growth target this year.


          The main reason is because of the ZERO COVID policy that enforces multiple lockdowns. And many restrictions have a direct impact on income, savings, and investment.

       China’s economy is the second largest in the world, meaning any disruption to the economy could affect the global financial system.

       Many are concerned that the impact will spread to other markets. Banks will not lend money. If they view the real estate sector as frozen.

        “It will all depend on policy,” says Ding Shuang, head of Greater China economic research at Standard Chartered. “Unlike in other parts of the world where property bubbles break because of the markets, this is government-inflicted.”

       Thirty real estate companies have already missed foreign debt payments. Evergrande, which defaulted on its $300bn debt, S&P has warned that if sales do not pick up, more companies could follow suit.

       The demand to buy homes is not increasing as China is facing population change. Both urbanization and population growth are slowing.

       The demand to buy homes is not increasing as China is facing population change. Both urbanization and population growth are slowing.

How did China get to this point?

       Of the total personal wealth in China, 70% is real estate. And home buyers in China are different from our country’s; they often pay upfront for unfinished projects.

       These “pre-sales” make up 70%-80% of home sales in China, Mr. Evans-Pritchard said, adding that developers need that money because they use it to fund several projects at once.

       However, many new generations and the middle class in China are no longer investing in real estate, owing to a weak economy, unemployment, and wage cuts, and the fear of being cheated has grown even stronger.

       because more than $220 billion in loans are involved in unfinished projects. According to information from the ANZ Banking Group,

       In 2020, China’s government introduced the “three red lines” – to control how much the loan ceiling is for real estate companies. That cut off funding, and the result is a lack of confidence in the market that has also affected banks’ willingness to lend to property companies.

What is the Chinese government doing?

         One of the obvious things is that the government of China has put the burden on local governments to solve problems. Now, these local governments are proposing deposit cuts, tax breaks, subsidies for homebuyers, and funding for developers. However, these policies are a burden for local governments, which are currently using the fund budget. And now there are fewer developers buying land. This is an important source of income for the Chinese local government.

         The Financial Times reported that China issued $148 billion in loans to help property developers, and Bloomberg reported that mortgage holders may be given a payment holiday without it affecting their credit score.

           Oxford Economics recently issued a warning that any government intervention in the real estate market may provide a short-term boost but that “it is not ideal for China’s longer-term growth as the government and the financial sector are being forced to help sustain an unproductive (and failing) real estate industry.”

          This is also not just a financial crisis. Failure to pay off house payments risks developing into a social problem, Mr. Ding Shuang pointed out.

       And that could become a problem for President Xi Jinping at the Communist Party General Assembly in the coming months, where he is expected to seek a historic third term.

what will happen

          Analysts say the loan of $148 billion is likely to be insufficient. Capital Economics estimates companies may need about $444 billion just to complete halted projects.

       This crisis is the clearest indication ever that the Chinese economy has reached a crossroads.

       “The government is trying its best to find new sources of growth but that’s going to be challenging because the economy has been very reliant on property, infrastructure investment and exports over the last three decades,” Mr. Evans-Pritchard said.

       “The era of very rapid growth in China is probably now over… and that’s most obvious in the property sector at the moment.”

Reference : bangkoknews

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