CHINA’S ECONOMY CAUGHT IN A REAL ESTATE DEBT SPIRAL

Busy antagonising neighbours over self-nurtured disputes, the Chinese Communist Party is suddenly forced to wake up to a shocking revelation that its economy is being dragged down by a major real estate crisis.

The Chinese GDP is said to have grown by just 4.9 per cent in the third quarter of the current financial year and the slow-down is on account of not just the unsettling power shortages or shipping disruptions but the growing debt of the real estate industry that has risen to $5 trillion. Several top companies are in deep trouble and that is where the source of the country’s economic problem is.

CNN reports: “Compared to the prior quarter, the economy grew a mere 0.2% in the July-to-September period — one of the weakest quarters since China started releasing such records in 2011. But some of the most significant concerns for growth are now rippling through the real estate sector, which is suffering from the energy woes along with a government drive to curb excessive borrowing.”

In a lay person’s language, the problem relates to overwhelming investment in real estate because China has no property tax. There is no tax to be paid by a person for owning an apartment or a house as prices rise and profit increases. Eighty per cent of China’s household wealth is tiede up in real estate. A whopping part of corporate holdings are similarly tied in real estate.

President Xi Jinping has often talked of introducing property tax. However, he faces opposition from across the board. The reason is simple: Having a tax means having a data base of property owners. Majority of the owners are officials, politicians and businessmen whose names would become known to the government. So, people in general fear economic disaster if the real estate sector is affected by a tax proposal.

Chinese President Xi Jinping’s desire to control the housing market is no secret. In 2017, he famously announced that “housing is for living and not for speculation”, media reports say, adding: “But Beijing’s campaign has gained additional momentum during the coronavirus pandemic, as the government became concerned that too much cheap money was flooding a sector that was already highly leveraged. That worry led authorities to force developers last year to trim their debt levels.”

The current crisis has its roots in Chinese government targeting real estate business. The property market in the country was becoming overheated and the government began to insist that developers must reduce their debt levels apart from holding runaway home prices. Ever since, the big real estate companies, like Evergrande, started facing major debt problems and gradually the entire sector caught the infection.

The government, according to media reports, “seems unlikely to do much to ease its tight curbs on the real estate sector, according to economists at Société Générale — ‘possibly because they are attributing most of the blame to the power crunch, which has now eased but is not resolved’”.

As major firms and companies started crumbling under the debt burden, financial institutions began to slash their forecasts for China’s GDP growth in 2021-22 and 2022-23. According to CNN, “Oxford Economics, for example, cut its forecast for fourth quarter growth to 3.6% from 5%”. The firm recently trimmed its 2022 GDP forecast to 5.4% from 5.8%, mostly due to concerns about the real estate sector, power shortages and Covid-19, it says. The “relatively large economic footprint” of the real estate sector in China — it comprises about a quarter or so of GDP — means even a gradual or “managed” slowdown would “significantly” affect the economy.

What started the domino’s effect in the real sector was the second biggest Chinese company, Evegrande, coming close to bankruptcy in early October. The company is sunk in debt worth more than $300 billion. It has has  1.6 billion undelivered apartments hanging in the balance.

Several big banks and millions of investors across the world are exposed to its debt heap. Among its debts is $20 billion worth international bonds. The company sold part of its stake in a Chinese bank and raised $1.5 billion but that proved to be a drop in the ocean. It still failed to meet a repayment schedule in September, the third time it did so in quick succession.

Evergrande’s stock nose-dived nearly 80p% this year. Its market value has collapsed to $5 billion. It stopped trading since early October after its shares were suspended.

The run on Evergrande had a negative impact on other major real estate names in China. Fantasia Holdings, a luxury apartments developer from Schenzen, is on the verge of defaulting on its external debts after failing to pay $315 million to lenders in mid-October. Its shares are down 60%.

A subsidiary of China Properties Group defaulted on $226 million worth of payments on bonds due recently. Beijing-based developer sought extra time from investors to repay a $250 million bond that is due before October-end. Sinic Holdings is the fifth company likely to default on some of its bond payments worth $250 million.

The government is desperate to see that the Evergrande fiasco does not spell doom for the economy. However, it has a problem: Whom to assuage first, the consumer or the developer?

Real estate in China is among the highest in the world. In capital Beijing, the average cost of a home is 14 times the average salary of a citizen. In the smallest cities the ratio comes down to five times the salary. Still, people do anything, even borrow heavily, to invest in the sector. Nearly a third of their income goes into the sector in the form rents or mortgages. A collapse of the sector will wipe millions of Chinese. It is estimated tha t90 per cent of Chinese households are homeowners. That is a dire situation, the implications of which are not reassuring at all for the government.

On the other hand, the developers sunk more money into the sector as people continued to invest more. Neither party bothered about the mounting debt, the companies more so. The people, who save a lot, had a lesser percentage in debt burden in comparison. As the sector’s profits grew, artificial hikes in home prices happened till a day came when homes began to remain unoccupied and unsold. As of date, it is officially estimated that 65 million homes, nearly a fifth of the total, are empty. Imagine what such a situation can do to a $52 trillion economy of the real estate sector? It came undone.

The government is putting up a brave face, forcing government-affiliated developers to buy up Evergrande’s assets, Reuters says. The People’s Bank of China has stepped in, saying even though the company mismanaged its business, the risks to the financial system are “controllable”. However, the government is expected to eventually make the consumer its first priority. It is intent on managing defaults and bankruptcies to ensure “social stability” and then negotiate a deal with the creditors.

Experts feel the government is caught in a cleft stick: If it bails out the developers to help the consumers, the debt will only pile up more and lead to a worse crisis in the future. On the other hand, the government could begin to strictly regulate the real estate sector as part of the process of increasing state control over various sectors.

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