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A perfect storm is brewing in China, threatening the entire economy.
China’s economy is experiencing its worst growth in decades and is expected to grow by just around 3.3% this year. This is a far cry from Beijing’s original target of 5.5% for him. Xi Jinping’s zero-corona policy and repeated lockdowns are hampering industrial activity. The Chinese yuan breaks the $7 magic wall for the first time in years, and China’s property sector sits on a debt volcano that is poised to erupt, engulfing the entire economy .
Year after year, China’s real estate sector has been viewed as the best place for Chinese to invest. As a result, house prices have continued to rise, reaching price levels achievable only through the combined wealth of generations. In a country with a one-child policy, four grandparents and two parents must pool their money to buy a home for their only offspring. By 2020, home prices had reached 17 times her median annual income.
Like the tech and housing bubbles in the US, the constant upswing in the real estate market attracts new investors, which in turn pushes up prices and attracts more investors, with real estate accounting for 25% of China’s total investable value. continued until asset and will account for over 40% of China’s GDP in 2021.
China’s real estate industry is built on a mountain of debt. China’s banking system may already be facing $350 billion in defaults on its debts, but there could be many more in the future.
In China, prospective buyers often buy contracts for unfinished apartments. The developer will tell you the date they can move in, and the buyer will start making mortgage payments. In the meantime, the buyer will either live with her parents or continue paying rent for the apartment and will also pay this new mortgage. If the developer delays the completion of the apartment, the buyer will have to pay the mortgage and continue to pay the rent until they move to the new apartment.
Developers collect and leverage money from new buyers and use it as collateral for debt they borrow from state-owned banks. They then use that debt to fund their next housing start. They pre-sell those units to the buyer, who starts paying. The developer collects the payment, uses it as collateral, takes more loans, and starts the next development. Almost by definition, the Chinese property market is a Ponzi scheme, similar to what Bernie Madoff was sentenced to 150 years in prison. It works as long as people keep putting money in, or as long as house prices keep going up.
Over the past two years, the economy has slowed, ultimately resulting in a decline in real estate demand of around 30%. With house prices falling, less collateral available for loans, and demand falling, developers are unable to raise money from sales to complete units already under construction. As a result, most of China’s top developers have defaulted or are expected to do so in the near future. And many developers stopped working on existing projects due to lack of funds to continue. As a result, banks have increased their bad debt portfolios. And citizens who have to sacrifice their savings for uninhabitable apartments are left with bags.
Over the past few months, hundreds of thousands of Chinese homebuyers have staged protests and even organized a mortgage boycott. They refuse to pay him more than $300 billion for homes that didn’t finish on time. Citizens are right to protest in this way, but the lack of payments to developers is accelerating the number of loan defaults and abandoned projects. This is called financial contagion. Bad news in one part of the real estate sector spreads to others, and problems grow like a snowball rolling downhill. The loss of confidence and the economic downturn are reflected in the decline in stock prices. The 33 developer’s stock has lost 3.7% in value over the past six weeks. And it’s not just the real estate sector that suffers.
If the entire real estate sector collapses, the combined liabilities could lead to bankruptcy. Banks now hold him $5.4 trillion in mortgages alone. While the industry as a whole is unlikely to collapse, project shutdowns and ongoing defaults have spread to other industries. Problems in the real estate sector mean less construction. Less construction means less sales and transportation of materials such as steel and concrete. It also means less work.
Most of China’s banks and even some of its properties and affiliates are state-owned, so the central government may have to bail them out. Of course, this comes at the worst of times when the Chinese economy and currency are already weak. This requires the central government to take on more debt, but the country’s total debt, public and private, is about 268% of GDP. Beijing may even be forced to increase its external debt. This is a problem because China’s external debt is denominated in dollars and the central government must either deplete its dollar reserves or rush to buy dollars to service its debt.
Beyond China’s borders, this real estate crisis could affect countries exporting to China. The US trade deficit with China is regularly in the news, but China is one of the US’s biggest export partners, and those exports would disappear if China were to fall into recession. The same applies to Germany, Hong Kong, South Korea and Japan, all of which rely on trade with China for a significant percentage of their total exports.
Germany and the Eurozone face their own economic challenges, depreciating currencies and rising energy costs. As a result, the collapse of China’s banking sector could easily affect Berlin and her EU-wide, and possibly other banks in the world.
Author bio:
Antonio Gracefo high blow magazine Contributor and Ph.D. He also has his MBA in China from Shanghai Jiao Tong University. He works as an economics professor and Chinese economic analyst, and contributes to various international media. His publications include The Wrestler’s Dissertation, Warrior Odyssey, Beyond the Belt and Road: China’s Global Economic Expansion, and A Short Course on the Chinese Economy.
For high blow magazine
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— Stephen (Pxhere, Creative Commons)
— Tauno Talk (flickerCreative Commons)
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—Pxhere (Creative Commons)
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