The Party’s Over for China’s Real Estate Sector

Evergrande’s headquarters, in Shenzhen, on 26th september 2021 | afp.com/Noel Celis

This column was previously published in L’Express on 18th august, 2022

Some people in China are refusing to pay back their mortgage loans, thereby aggravating the crisis that is threatening the economic recovery.

“Housing is for people to live in, not for speculation.” This principle, prescribed once again by the Chinese government, is giving Chinese savers front row seats when it comes to the real estate crisis. This crisis grew out of the same arrogance that characterized Ben Bernanke [former chair of the Federal Reserve] in the USA in 2005, and led Chinese regulators in late 2021 to underestimate the importance of the Evergrande bankruptcy. Since then, this debacle has contaminated the whole of the real estate market: sales of residential properties have plummeted by 35% since the beginning of the year.

This boycott threatens one of the mainstays of Chinese growth of the last 20 years

Locked in denial, the authorities are now seeking to minimize the impact of this sudden refusal to pay back loans, triggered by small borrowers who had pre-financed the construction of their future apartments. At this stage, only 300 projects in a hundred or so cities are concerned, but this boycott threatens one of the mainstays of Chinese growth of the last 20 years. In 2005, 58% of new real estate sales were pre-financed by buyers. In 2021, this proportion had increased to 90%! Legally, this finance had to be attributed to the project concerned but, in fact, it enabled certain unscrupulous developers to underpin their stock of unsold projects. This practice was all the more socially reprehensible as the first victims were migrant workers who had been sent into the top Tier cities, and had invested their tiny savings in their native provinces, like Henan.

Experts from Deutsche Bank try to be reassuring, pointing out that only $270 to $300 billion are at risk, and that it only affects 4% to 5% of all mortgage loans. However, the real danger is in the way it is aggravating Chinese consumers’ loss of confidence. Increases in real estate values have been the main source of the “wealth effect” that has underpinned the growth of domestic consumption.

The result has been that, in the first quarter of 2022, savings in China rose by 30% in comparison with the previous year. This increase of about $1,500 billion brought a sudden halt to consumption, further hindered by a feeling of insecurity because of lockdowns and the “zero Covid” policy. Another result is that the ten-year interest rate on Chinese Treasury Bonds, at 2.8%, is at the same level as its American equivalent! Investors are now projecting a similar long-term growth potential for both world powers. This is a far cry from Chinese government propaganda that talks about inflicting revenge on Uncle Sam by 2049! We should be less afraid of the bursting of the real estate bubble — similar to the one that happened in the USA in 2008 — than of the structural slowdown of Chinese growth in the future, which is all the more probable given banks’ reluctance to save real estate projects that are now unprofitable, and the renewed desire of the Chinese government to no longer have recourse to the easy solution of mega stimulus plans, as is the case in the West.

Savings, which were up by 30% in the first quarter of 2022, brought a sudden halt to consumption

This real estate crisis has come at a particularly critical time, when preparations are being made for the October Congress which is due to grant a third term of office to President Xi Jinping. Added to this is increasing criticism — from the top echelons — of the “zero Covid” policy, as well as a disturbing increase in unemployment, particularly among young people, as a result of the regulatory war that has been waged against the private sector for the past year.

There promise to be lively discussions in Beidaihe, a seaside resort where Chinese Communist Party leaders traditionally take up their summer quarters. The government may well need to take a few dips in the sea in order to bring down the ambient temperature, for rising temperatures in China this summer will not only be due to global warming. This is undoubtedly the reason why Tesla vehicles — supposedly equipped with cameras and listening devices — will temporarily be banned from the city.

Beidahe. Copyright: Alex Santafé for Sup China.com

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David Baverez

Business angel / demon. Based in Hong Kong since 2011. Columnist, author of “Paris-PekinExpress”, “Beijing Express” and “Génération Tonique”.