Real Estate

Could China’s Real Estate Crisis Collapse the Global Economy?

“A house is for living, not for speculation,” Chinese President Xi Jinping has repeatedly said over the past six years. He said this while addressing his 19th Party Congress in 2017. And now, as President Xi Jinping seeks an unprecedented third term at the 20th Party Congress in a few months from now, he is witnessing the worst horrors unfold. – Great crisis in the real estate sector of the country.

A two-decade-long real estate boom, fueled by income from existing homes and debt, has made Chinese real estate the world’s largest single asset class, worth more than $50 trillion.

In August 2020, China issued guidelines limiting the amount that can be borrowed to force developers to deleverage. The measure, dubbed the “three red lines,” cut some developer’s credibility and caused a series of defaults.

Xi’s crackdown on soaring property prices means nine real estate magnates have lost $79 billion in assets since 2020. The erosion of their fortunes symbolizes the crisis that has engulfed China’s real estate sector. It is a household asset and accounts for his 30% of GDP.

China Evergrande Group is the world’s most indebted property developer

China’s Evergrande Group, which has amassed $305 billion in debt and has become the world’s most indebted property developer, was the biggest victim. Evergrande went bankrupt in December last year.

Over the past year and a half, Chinese developers, including top players like Kaisa Group, Shimao Group and Sunac China, defaulted on at least $18 billion in offshore dollar-denominated bonds and $2.5 billion worth of onshore debt.

Home prices and sales in China have fallen for a record 11 straight months as consumer confidence in the property market weakens. This makes it more difficult for developers to pay for construction, given that up to 90% of all property sales in China are made up of upfront sales.

Compounding the crisis, tens of thousands of homebuyers have refused to pay mortgages on unfinished construction projects.

According to Nomura, between 2013 and 2020, only about 60% of the homes pre-sold by developers were actually delivered. In just two months, the boycott has spread to at least 320 projects in his 99 cities, making it perhaps the largest mortgage protest in China’s history.

Chinese banks have around $9 trillion exposure to the real estate sector, of which $5.3 trillion is in the form of mortgages. Analysts estimate that as much as $291 billion in loans could be affected by a boycott. However, in contrast to the 2007 U.S. subprime mortgage crisis, when money was lent to high-risk borrowers who later defaulted, many in China, though able to pay, decided not to. selected.

[Byte of Ananth Narayan, Associate Professor, SP Jain Institute of Management & Research]

Meanwhile, China stepped in to help developers facing funding shortages by providing $29 billion in special loans through its policy banks.On Wednesday, China announced an economic stimulus package. This includes $44 billion that state policy banks can invest in infrastructure projects.

But research firm Capital Economics estimates that developers need $444 billion to complete dormant projects.

Stimulus packages provide relief to local governments responsible for infrastructure spending.

As the housing crisis deepened, demand for land purchases from developers collapsed. As a result, municipal revenues from land sales, a major source of income, have plunged 32% this year.

A complete collapse of the Chinese economy and banking system seems unlikely, but a soft landing of the government-busted real estate bubble is unlikely.

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