China is on edge as the effects of its real estate crisis continue to spread
Beijing intended to cool its housing market, but the repercussions from debt-laden developers and falling sales spread to the broader economy, creating a larger problem.
A type In a market saturated with risk-takers, a Chinese real estate developer is on the verge of default. Due to a lack of funds, one of China’s largest asset administrators has missed investor payments. Furthermore, billions of dollars have left the country’s stock markets.
August in China has been a dizzying voyage.
What began three years ago with a crackdown on hazardous business practices by home builders and a subsequent housing slowdown has accelerated dramatically this month. The economy as a whole has been threatened, and consumer, business, and investor confidence has been eroded. China’s typically hands-on policymakers have thus far done little to allay concerns and appear intent to reduce the country’s economic dependence on real estate.
Charles Chang, chief of corporate credit ratings for Greater China at Standard & Poor’s, remarked, “What is happening on the Chinese property market is truly unprecedented.”
In the last three decades, as China’s population grew and its people migrated to urban areas in search of economic opportunity, developers were unable to construct contemporary apartments quickly enough, and the real estate industry became the engine of a transforming economy. The real estate industry employed millions of people and served as a repository for personal resources. Currently, the sector accounts for over a quarter of all economic activity.
During what appeared to be an endless construction boom, China’s dependence on real estate was profitable, but it has become a liability after years of excessive borrowing and overbuilding. When China’s economy was expanding at a faster rate, developers borrowed more money to pay off their accumulating debt. After emerging from the debilitating pandemic lockdowns imposed by its leaders, China is now struggling to regain its footing, and many of its economic problems can be traced back to real estate.
Chinese consumers are spending less in part because a decline in housing prices has diminished their savings, a significant portion of which is invested in real estate. Formerly abundant housing-related jobs, such as construction, landscaping, and painting, are diminishing. Companies and small businesses are hesitant to spend due to the unpredictability of the crisis’s potential scope.
The crisis is a dilemma created by the government. For decades, regulators permitted developers to subsist on debt to finance a growth-at-all-costs strategy. Then, in 2020, they abruptly and drastically intervened to prevent a housing bubble. They halted the flow of inexpensive money to China’s largest real estate firms, leaving many cash-strapped.
Companies began to fail one by one as they were unable to pay their expenses. Standard & Poor’s reports that more than fifty Chinese developers have defaulted or failed to make debt payments in the past three years. A reality of China’s real estate growth has been exposed by the defaults: the borrow-to-build model only works as long as prices continue to rise.
As the crisis has worsened, Chinese policymakers have disregarded demands to intervene with a substantial rescue plan. They have opted for more modest measures, such as easing mortgage requirements and lowering interest rates.
In an editorial published on Friday, the state-run Economic Daily stated that it would take time for recent policies to take effect: “We must recognize that the process of defusing risk cannot be completed overnight, and the market must be patient.”
But many changes have occurred in recent months. Households scaled back on large expenditures, and sales of apartments plummeted. This shock altered the fortunes of Country Garden, a real estate colossus that the government once held up as an example. The company expects a loss of up to $7.6 billion in the first half of the year and claims it is confronting the greatest threat to its business in its 30-year existence.
Country has only a few weeks to come up with the cash necessary to make interest payments on some of its bonds, or it will default alongside its peers. It also has unpaid invoices totaling hundreds of billions of dollars.
Fears have extended to additional markets. In Hong Kong, where many of China’s largest companies are listed, confidence has plummeted to such an extent that the stock market has entered a bear market, falling 21 percent from its January peak. In the past two weeks, investors have withdrawn $7.5 billion from Chinese equities.
In addition to spreading to China’s so-called shadow banking system of financial trust companies, the real estate woes are affecting China’s so-called shadow banking system of financial trust companies. These institutions offer investments with higher yields than conventional bank deposits and frequently engage in real estate projects.
The most recent problems emerged earlier this month. Two publicly traded Chinese companies warned that they had invested funds with Zhongrong International Trust, which manages approximately $85 billion in assets, and that Zhongrong had neglected to pay them back. It was unclear whether these investments were related to real estate, but according to the South China Morning Post, Zhongrong was a significant shareholder in several defaulting developer projects. Zhongrong did not respond to a request for comment via email.
Outside the Beijing offices of Zhongrong, an irate mob of Chinese investors demanded that the company “pay back the money” and demanded an explanation. It was unclear when the protest occurred; videos of it were uploaded this month to Douyin, the Chinese equivalent of TikTok.
The protest was reminiscent of previous acts of defiance in China that were precipitated by the housing crisis. Such occurrences are uncommon, but a few recent examples exist.
In February, tens of thousands of retirees in Wuhan confronted government officials to protest reductions in government-provided health insurance for seniors. The cutbacks were an indication of the strain on local governments caused in part by the real estate downturn, which hindered land sales, a reliable revenue source.
Hundreds of thousands of homeowners refused to pay mortgages on undeveloped apartments in the past year. Some uploaded protest videos to social media, while homeowner associations monitored boycotts online.
Both protests attracted attention, but their momentum waned as the government intervened to limit social media discussion and took steps to reduce tensions. A new video taken outside Zhongrong’s offices last week revealed no protests, but police vehicles parked in and around the building.
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