A serious real estate crisis still compromises the Chinese real estate sector, which represents more than 25% of the country’s economy. The top 100 Chinese developers saw a 28% drop in new home sales from October 2021 to 2022, according to data released by the China Real Estate Information (CRIC) market agency. Cumulative sales in the first ten months were down 44% year-over-year.
Beijing announced on Monday (14) the launch of initiatives to rescue the real estate sector. Although without describing them, the Chinese Communist Party has declared that it will increase access to credit to help indebted developers who have defaulted billions and left works at a standstill in “ghost neighborhoods” in the country.
For Ting Lu, an economist at Nomura bank, interviewed by AFP, this easing reflects a “turning point” of the Chinese authorities, who decided, in 2020, to tighten access to credit and created a political crisis, given that the central power destabilized the sector and the economy in general.
Despite the official announcement, the hole is so big that it may be too late. In an interview with China Newsweek, Wang Xiaolu, a renowned Chinese economist, says he is sure the bubble will burst soon. The former director of the research office of the Foundation for Reform in China describes that state land sales are in free fall, showing a decrease of 31.7% in the first half of 2022. The number of houses built would be disproportionate to demand and a third of the properties remain unsold. The result: more than 80% of companies in the sector are deeply indebted.
“From 1999 to 2021, the areas under construction were, on average, more than three times larger than the areas sold each year”, say experts on the Chinese economy in an analysis note by the General Directorate of the Treasury of France, Thomas Carré, Lennig Chalmel, Eloïse Villani and Jingxia Yang.
In the late 1990s, China experienced a boom in the real estate sector, after the liberalization of the market. Businesses grew very quickly, especially thanks to bank loans. The amount of new buildings has grown exponentially over the 20-year period. So much so that the country’s economy has become dependent on this sector, which currently accounts for more than a quarter of China’s growth. This real estate frenzy led to soaring prices, especially in 2016. That year, according to the National Bureau of Statistics, prices had risen by 26.4% in Beijing and 29% in Shanghai.
Progressive corporate debt forced Beijing to tighten bank lending rules two years ago. This tightening had a damaging effect on developers already in financial difficulties and caused a liquidity crisis, which is when the bank is unable to promptly cover a greater demand from its customers for funds. At the same time, the Covid crisis since 2019, with the excessive confinement imposed by the Chinese dictatorship, cooperated to slow down the entire economy.
“State decisions, to withdraw credit from companies and to impose the Covid Zero policy, damaging the economic system, were fundamental to this Chinese crisis”, observes the economist and CEO of Grupo Datacenso, Claudio Shimoyama.
Manifestation of owners
More than a million apartments are unfinished in China today, which plunges homeowners into anger and fear. In this way, some demonstrated in the fall of 2021 in Shenzhen, where Evergrande, number one in the sector, is headquartered. Others decided, in the summer of 2022, to simply stop paying their loans in protest. At least 300 groups, made up of thousands of landlords, in 91 cities, are on strike.
Off-plan pre-sales are the most common way to “sell” real estate in China. The verb is in quotes, because in the country there is no real sale of houses or apartments, but a rent for 70 years of properties that belong to the provinces.
Evergrande has a billionaire debt (US$ 300 billion, R$1.6 trillion in the current conversion). The company defaulted on its bonds in dollars last year and is being sued by Shengjing Bank for defaulting on approximately $4.5 billion, according to Yicai Global, China’s leading financial news group based in China. in Shanghai. According to an analysis by MacroPolo, the situation in the real estate sector should not improve without a bailout from the central government, which still seems unlikely.
“Sales will remain sluggish as the property market may not recover until at least the middle of next year,” a marketing official at a property developer in Fujian province predicted to Yicai.
In October, new home prices in 100 cities fell for four straight months, while used home prices also fell for six straight months, according to the China House Price Index.
Data from the country’s Central Bank show that both income and house price expectations are at their respective lowest points in nearly 20 years.
China’s slowdown and global consequences
The real estate sector was one of the pillars of growth in China, especially through regional banks. It was also one of the financial security bets of the second largest economy in the world in the face of the crisis resulting from Covid-19. However, this disastrous scenario compromises the national and world economy.
“China has become the biggest trading partner for a number of countries. If this real estate sector does not grow, China will not only not grow, but will also reduce its purchases from the rest of the world”, points out João Alfredo Lopes Nyegray, doctor in strategy, coordinator of the Foreign Trade course and professor of Geopolitics and International Business at Universidade Positivo ( UP).
The Chinese giant, which had a GDP growth of 8.1% in 2021, now has a timid growth forecast of just 3% in 2022. Despite still being a positive percentage, the slowdown of the Chinese economy should make it fall, Brazilian exports, for example, because it affects internal dynamics and reduces Chinese investments abroad.
“It’s as if this bicycle is not just standing still, but is starting to move backwards”, explains Igor Lucena, economist and doctor in International Relations. “This, today, is the greatest global geoeconomic risk that exists”, he adds.
The International Monetary Fund (IMF) has warned of the risk of “contagion from the Chinese real estate crisis to the world economy and markets”.
“A sharper-than-expected slowdown in the real estate sector could have a wide range of negative effects on global demand,” the agency said in a report sent to China earlier this year. The real size of the problem is still unknown, due to the lack of transparency of the Xi Jinping dictatorship.
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