Chinese real estate market: Explained: why China’s crumbling real estate sector has the world in suspense

Chinese home buyers are running out of patience as the country’s housing crisis threatens to spin out of control. Hundreds of thousands of home buyers have begun a “mortgage boycott”, refusing to pay their mortgages for unfinished or stalled housing projects.

As of July 18, homebuyers in 80 cities and 200 projects had threatened to stop mortgage payments.

According to analysts from GF Securities Co. and Deutsche Bank AG, the total mortgage lending in stalled Chinese developments stands at 2 trillion yuan ($296 billion).

Home sales have plummeted nearly 60% from a year ago, and the current steady decline in sales (11 months) is considered the worst in China’s history.

Analysts expect property sales to have fallen 25% from January to June, amid China’s ‘Zero Covid Cases’ strategy. Many developments in China have stalled as property developers have run out of capital to complete construction.

Across China, real estate developers are desperate – trying to sell houses by any means possible, even going so far as to accept down payments of wheat, garlic, watermelon and peaches to meet farmers’ needs.

Card castle

What started as problems with the Evergrande Group is snowballing into a crisis that threatens to engulf some of the country’s biggest developers, its lenders and a middle class that has significant wealth linked to the housing market.

About 70% of the country’s household wealth is stored in property, along with 30-40% of bank loan books, while land sales account for 30-40% of local government revenue, according to Pantheon Macroeconomics.

A working paper released by the National Bureau of Economic Research in 2020 estimated that China’s real estate sector accounts for 29% of the country’s GDP, or about $4 trillion out of $14 trillion.

Evergrande aren’t the only band in trouble. Several indebted developers such as Fantasia Holdings, Sinic Holdings Group, Modern Land have defaulted or are heading towards default. Sunac, China’s third-biggest developer, also saw its credit rating cut sharply as concerns over debt repayments surfaced.

three red lines

In August 2020, in an effort to better manage the highly indebted sector, Chinese regulators introduced rules dubbed the “three red lines” to limit borrowing by property companies. The three red lines require developers to maintain:

  • A debt ratio of 70% or less,
  • A ceiling of 100% of net debt over equity,
  • Sufficient cash to meet short-term borrowings, debts and liabilities.

Each red line crossed reduced a company’s ability to take on more debt. If the three lines were crossed, a company could no longer go into debt.

However, a Reuters report found companies were using a variety of tactics to take debt and projects off the balance sheet, or debt disguised as equity, to comply with the “three red lines” policy.

At the end of 2020, China’s local government debt stood at $4 trillion. Goldman Sachs estimates that the “hidden” or “fictitious” debt amounts to 8,000 billion dollars, or more than half of the country’s GDP.

Global impact

The collapse of China’s property market has set off alarm bells around the world. It is still the manufacturing hub of the world and if its economy falters, countries around the world would suffer from slower and more expensive exports.

Contract electronics and semiconductor manufacturing, where China is a global leader, had already stalled various sectors such as automotive, consumer electronics and more due to bottlenecks in the supply induced by Covid. This would only increase in the event of an economic crisis.

China is also the global creditor of the developing world. Developing countries dependent on China for infrastructure projects would be hit hard.

The Xi government has sponsored many projects under the Belt and Road Initiative. Currently, B&RI projects are valued at over $1 trillion in 139 countries around the world. These construction sites, highways, power stations, etc. could remain unfinished.

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