China’s real estate prices have fallen and the debt crisis has intensified. According to the Bloomberg Intelligence index, the stock value and bonds of Chinese real estate companies have “evaporated” by $90 billion this year. The bubble is bursting, and its negative effects are spreading, endangering the Chinese economy and financial system.
Housing Bubble Burst Threatens China’s Economy
House prices in many Chinese cities are now falling after a long period of upward mobility. According to China Real Estate Information Corp., a real estate industry data provider, property sales across the country for some of China’s largest developers have continuously fallen for 13 consecutive months.
In addition, millions of pre-sold homes are still unfinished, triggering a wave of “stop supplying” among homebuyers who have already paid for their homes. Analysts estimate that homebuyers could refuse to pay mortgages totaling as much as $370 billion if the properties they bought remain unfinished.
The bigger risk is the impact on the Chinese economy. In a report last month, Bank of America research analysts pointed out that about 9% of pre-sold residential properties in 2020 and 2021 may not be completed and handed-over, affecting about 2.4 million households.
Observers pointed out that if such an issue is uncontrolled and widespread, it could reduce market confidence, real estate sales and investment, weighing on overall economic growth, and causing social instability.
A 7% contraction in the real estate sector in the second quarter also contributed to a weaker GDP. China’s GDP grew just 0.4% year-on-year in the second quarter, which is the worst quarterly business performance since the outbreak of the CCP virus (coronavirus).
The decline in housing and real estate services, results in loan losses for banks. In addition, stocks and bonds of Chinese real estate developers wiped out $90 billion.
Real estate has always been the main driver of China’s economic growth. In the past, whenever the economy was weak, the CCP took measures to loosen its real estate policies, and then the economy would grow. At the same time, real estate has also created a huge bubble. According to Goldman Sachs, an American investment bank, the real estate volume in China has reached $52 trillion. According to Sound of Hope, Wu Xiaoling, a Chinese financier and former deputy governor of the Central Bank, estimates that this number may reach $58.9 trillion or 400 trillion yuan, which is a Goldman Sachs estimate. The Wall Street Journal called it an “epic bubble.”
As Sound of Hope reported, Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, has repeatedly spoken publicly, calling real estate the “biggest gray rhino” that threatens financial security. In 2020, the CCP strengthened the prevention of real estate bubble risks, and frequently introduced regulatory measures to limit the expansion of developers with “three red lines” setting an upper limit.
The CCP’s restrictive measures had an “immediate” effect. Evergrande, China’s largest private developer, was the first to fall into debt. And then the real estate company left thousands of unfinished properties in various parts of China, and people everywhere had to cut off loans in protest.
Slumped home sales led to an unprecedented cash crunch that spread risk across the financial system and threatened social stability.
In order to avoid a systemic economic and financial crisis and social unrest, the CCP tried to stabilize the sluggish real estate market and resorted to various relaxations of real estate purchase restrictions. But the results were not good, market confidence was even lower, and the industry outlook became more pessimistic.
According to the Bloomberg Billionaires Index, the net worth of Yang Huiyan, the female head of China’s largest private developer Country Garden and Asia’s wealthiest woman, has plunged more than 52% to $11.3 billion from $23.7 billion a year ago.
China’s high-yield dollar bond market is even worse. This year, Chinese borrowers have defaulted on a record $28.8 billion in offshore bonds, almost all of them by Chinese property developers. Bloomberg estimated at the end of July that the median dollar bond price of Chinese real estate companies was 16 cents, compared with 40 cents in March, and about 80% of issuances were trading below 50 cents.
The vacancy rate of housing in 28 cities in China is 12%
A survey of 28 large- and medium-sized Chinese cities found that the average housing vacancy rate was 12%. Nanchang, the capital of Jiangxi province, reached 20%, with one fifth homes vacant.
The Shell Research Institute recently released the “2022 Survey Report on Housing Vacancy Rates in China’s Major Cities,” focusing on the study of 30,000 communities in 28 cities and taking data of the average housing vacancy rates in major cities this year for the first time. The housing vacancy rates are above 15%; Shenzhen, Beijing, and Shanghai have the lowest housing vacancy rates, below 7%.
Sound of Hope said that in general, a housing vacancy rate between 5% and 10% is reasonable, and a housing vacancy rate higher than 10% is considered to be too high, indicating an oversupply of housing and the risk of overstocking.
Many housing companies will close down
China’s real estate boom is over, and the unfinished building incident has affected market confidence, and it is likely that there will be more real estate collapses in the future.
According to a report from China Business News, there are rumors in the market that a national bailout fund being set up to save the housing market, but it has not been confirmed by official news. From the actual operation of the local government, the route is to “save projects but not enterprises,” and use limited funds to save it. Move leverage, screen qualified companies, and limit systemic risks.
Xia Bin, counselor of the State Council of the Chinese Communist Party and honorary director of the Financial Research Institute of the Development Research Center of the State Council, said at the recent 2022 Boao Real Estate Forum that the choice of rescue method cannot be divided into leading and non-leading enterprises, state-owned or private companies. A group of real estate companies will be restructured and transformed. Some real estate companies that have long been poorly managed and insolvent will be removed.