Crisis in China’s property market threatens its wider economy – The Irish Times

When Zhang Fang’s mother was 75 years old and Beijing’s hot summers were too much for her, she decided to buy an apartment on the beach some 700 km away for herself and the residents. He found a two-bedroom unit on the sixth floor of a building in a large project, built by one of the region’s most prominent developers, and paid the full price of 350,000 renminbi (€45,000) in advance.

Residents had already moved to other parts of the development, and the building he bought already had a roof, although there was no water or electricity connection. The developer said the apartment will be ready for occupancy within a year.

“After the scheduled move-in date, I kept getting text messages and phone calls from the developer saying it was delayed. A year later, the company’s senior executive went to jail for bribing government officials, and I couldn’t contact the developer. Then I heard that the company went bankrupt,” he said.

Five years after he last heard from the developer, Zhang’s apartment remains unfinished, the building has no running water or electricity, and no one cares. Officials offered to sell the undeveloped land in the project as bad assets, but no one wanted to take the unfinished building into his apartment.

“I can’t do anything. No money back, no going to that place,” he said.

Chinese people prefer to buy rather than rent compared to 70 per cent in Ireland and 90 per cent of households own their own home.

Zhang is among hundreds of thousands of people affected by the crisis in China’s property market, which has driven some of the country’s biggest developers into bankruptcy. The knock-on effects have impoverished local governments, hit China’s massive shadow banking sector and threaten to send the world’s second-largest economy into a deflationary spiral.

[ Deflation prompts renewed fears over strength of Chinese economy ]

This month, Country Garden Holdings, one of China’s largest private developers, defaulted on interest payments on two offshore bonds and stopped trading in a dozen offshore bonds. Sino-Ocean, a state-backed developer, said it defaulted on $20.94 million in interest payments and suspended trading on 6 percent warrants due in 2024.

Zhongrong International Trust, one of the largest shadow banks providing financing to developers, missed payments on more than 30 wealth management products. And the central government in Beijing is reportedly willing to allow local governments to refinance their huge, property-related debts amid default fears.

Rapid decline

New property sales by China’s 100 largest developers fell 28 percent in June, with 27 firms recording declines of more than 50 percent, according to China Real Estate Information Corporation, a Shanghai-based provider of property data and analytics. (CRIC). The decline accelerated in July, with private developers suffering more than state-owned companies.

The opening up of China’s economy and the migration of hundreds of millions of people from rural areas to cities has driven a massive expansion of the property sector since the 1990s, with property-related industries now accounting for 30 percent of the economy. publication. Chinese people prefer to buy rather than rent compared to 70 per cent in Ireland and 90 per cent of households own their own home.

All land in China is state-owned and local governments lease it to developers for 70 years for residential use and 40 years for commercial use. Land sales have become an important source of revenue for local governments that do not levy property taxes, and the downturn has left many of them struggling to finance their operations.

Developers often sell properties before completion and buyers often pay full price or all upfront. Until recently, state-owned developers and private developers each had half of the market.

A booming property market helped China avoid a recession following the global financial meltdown in 2008, but by 2016 it had all the signs of a bubble.

“Everybody was talking about house prices, prices are growing very fast. Everyone thought that if you don’t buy a place now, you won’t be able to buy a place in the future. I thought it would be too late if I didn’t buy it now, and I would have to pay more,” said Jin Shiju.

She couldn’t afford an apartment in the center of Beijing, so she moved to the outskirts of the city, choosing an apartment in an ambitious development with a theme park, an indoor tropical botanical garden, an artificial ski slope, a theater. A conference hotel and a shopping mall. She had to pay 50 percent of the total cost up front, but the project had a valid certificate to guarantee a bank loan to cover the remaining amount.

Soon after he made the payment, the bank told him they couldn’t give him a mortgage, and he realized the development was in trouble. Seven years later, it’s still not over and she can’t get inside.

Controlling prices

„The scheme is dead. We have a total of 300 families, out of which 100 have paid the full amount and 200 have paid the down payment. But none of the 200 families have got a bank loan, that’s lucky. Otherwise we have nowhere to go, but we will have to pay the loan every month,” he said. .

Beginning in 2017, Xi Jinping’s government introduced a series of policies aimed at controlling housing prices, declaring that „houses are for living, not speculation.” For example, second homes now require a higher minimum deposit and carry a higher mortgage rate and cannot be put back on the market for at least five years.

The moves are part of a strategic plan to shift investment from property to manufacturing, particularly in green technology. But while many of the apartment buildings were empty, local governments leased the land, and developers borrowed from shadow banks to finance new construction.

…The industry is facing a very difficult situation right now. In the six or seven years, from 2017 to now, China’s property sector has stalled.

— A property industry insider

In August 2020, authorities set new regulatory guidelines known as the „three red lines” as many large developers plunged into debt. Developers must have a liability-to-asset ratio of less than 70 percent, a net gear ratio of less than 100 percent, and a cash-to-short-term debt ratio of at least 1.

Companies can increase their debt by up to 15 percent if they meet all three conditions, but that limit drops if they violate each condition. The policy was successful in deflating the asset bubble – in fact, it was too successful for its own good.

„The impact on the overall property industry is that there is no property speculation and housing prices have been brought under control. But if you add other factors like economic slowdown and three years of zero Covid, the industry is now facing a very difficult situation. In just six or seven years, from 2017 to now, China’s The property sector has ground to a halt,” an industry insider told The Irish Times.

In 2021, Evergrande, which was the world’s most valuable property company three years ago, faced financial collapse after defaulting on some of its loans. Country Garden’s missed interest payments this month raised fears of a similar event, but in reality many of China’s biggest developers have been in trouble for years and their problems are deepening.

[ China Evergrande files for protection in US court as part of €29.1bn debt overhaul ]

The government has resisted bailing out developers and has ordered liquidation of properties to raise funds to complete unfinished buildings where apartments have already been sold. If private developers are unable to complete projects, sometimes state-owned companies can take them over.

Huge impact

The impact of the property crash is enormous, affecting everything from local government revenues to the market for basic raw materials like iron ore, oil and asphalt, and suppliers of everything from lighting and furniture to home appliances. Zhongrong’s missed payments highlight the risk to China’s $3 trillion shadow banking sector, which has financed much of the country’s property industry.

China’s real estate glut, the market has plenty of inventory for sale and demographic trends mean we won’t need as much housing in the future. Overall China’s property market is past its peak

— Industry insider

Authorities have announced several measures in recent weeks aimed at stimulating demand among homebuyers, including lower interest rates and looser lending rules. It is an industry insider that none of them will succeed.

„It’s useless. It can’t be stimulated,” he said. „China’s real estate is overstocked, there’s a lot of inventory on the market and demographic trends mean we won’t need as much housing in the future. China’s property market as a whole is past its peak.”

Other options for the government include building more social and affordable housing and funding urban renewal projects. But with the economy stalling, a collapsing housing market raises the risk of deflation, which could deepen the credit crunch.

Meanwhile, Zhang has given up hope of ever settling into the apartment her mother bought for her. He consoles himself that his loss is painful, but not catastrophic, and that he has learned a bitter lesson.

„There’s nothing we can do but accept it and move on,” he said. „From this experience, I learned never to buy an apartment. Rent one and avoid the risk.