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The housing market and its crisis represent the next stages of Beijing's stalling Economy. The strategies put into action to avoid property speculation were overturned in the hands of the Chinese government. Best intentions with ugly outcomes have been shredding the population and the workers since 2020.
In 2020 the National Bureau of Economic Research estimated that the property sector in China accounted for 29% of the country's economic activity. The real estate sector was considered a safe net for investors who looked up to China’s population flow over cities, seeking economic opportunities. However, what seemed to be a never-ending boom that attracted speculators, was stopped in August of the same year by the “three red lines” regulation. It was drafted to formally limit the borrowing of real estate firms and to prevent a housing bubble. The “three red lines” policy was tri-structured and put caps on debt-to-cash, debt-to-assets and debt-to-equity ratios, it follows the ideological principle of CCP General Secretary Xi Jinping's government for which property cannot be the object of speculation.
The austerity policies, the slow economic growth and the competition have slumped housing prices, causing default in real estate companies and investors. What was started in 2020 as a slowdown in risky business behaviour by home builders, followed by governmental policies that tried to avoid housing speculation, ended up being a liability after years of excessive spending, borrowing and overbuilding.
By April 2021, only a few firms did not comply with the regulations of the “three red lines”, one of them was Evergrande. Before the crisis, thanks to an aggressive plan of investments, the land reserve for the group was large enough to house around 10 million people. The expansion plan included Ocean Flower Island, a 100 billion RMB (US$15.5 billion) project to build an artificial island on the north shore of Hainan near Yangpu in the South China Sea.
In August 2021, a letter regarding Evergrande started circulating, informing the government the company ran out of cash, thus the impossibility of repaying debts. The crisis partially broke out from the difficulties of the firms in following the rules imposed by the Chinese government, it spread beyond Evengrande involving other groups creating an avalanche effect. By the end of the year 2021, after many missed payments and financial contagion, Evengrande was declared in restricted default. Moreover, the biggest property project on Ocean Flower Island (or Haihua Island) received a demolition notice from the People's Government of Danzhou, stating the illegality of the buildings. The order conflicted with Beijing’s perspective of selling to settle the debts.
Into 2023, the slow sales of the properties were not helped by the property price floor imposed by the government to prevent developers from cutting prices. By June, the developers were using any sort of incentive to prompt the selling, and by August it was estimated that 60-80 million apartments were empty in China, in contrast with the 300 million homeless people in the country. Investors call out the policymakers for not acting quickly enough to prevent a bigger crisis. The fear has started spreading outside of national Borders. In Hong Kong stocks have fallen in a bear market and over the last month, investors have pulled $7.5 billion out of Chinese stocks.
The latest news regarding an email accusing the Zhongrong International Trust, which is managing about $85 billion in assets, of having failed to pay the companies what they were owed. A crowd of angry investors has shown up outside the offices of Zhongrong to protest and call out the company's behaviour, demanding their money and an explanation.
More protests have broken out in the country in the last months. Wuhan retirees confronted the local authorities on cuts in government-provided medical insurance for seniors. It was partially the fault of the downturn in land sales, which created a hole in the government’s revenues. Many homeowners started refusing to pay their mortgage or the unfinished houses.
The housing market is just one of the problems the Chinese Economy is facing. The local government debt and the demographic declines are different faces of the same coin. The latter, as already mentioned, is caused by the decline in land sales and revenues as well as the cost of the post-pandemic period. In this way the ability of local financial authorities to push for growth is limited, together with the possibility of expanding the public services, on which cuts occurred as witnessed in Wuhan with medical insurances.
The demographic decline could be identified as part of a larger global challenge, which is the fertility rate drop: according to CNN, it scored 1.09 last year, -0,21 points lower from 2 years before. The ageing population influences the labour supply and will result in higher costs of social spending like healthcare and higher public debt.
Has the mirage of the Chinese economy come to an end?
References
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Shekhawat, J. S., & Coghill, K. (2023, January 5). China may ease 'three red lines' property rules - Bloomberg News. Reuters. Retrieved September 29, 2023, from https://www.reuters.com/world/china/china-may-ease-three-red-lines-property-rules-bloomberg-news-2023-01-06/
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