Alarm bells are ringing louder. Hundreds of depositors gathered outside the Zhengzhou branch of the People’s Bank of China in the provincial capital of Henan last week, demanding the freezing of their savings held in rural banks. A day later, tens of thousands of homeowners threatened to stop paying mortgages on dozens of unfinished housing projects they had purchased. All of this happened in a week when officials reported lackluster economic performance in the second quarter.
China’s economy faces a dangerous cocktail of slowing growth, high unemployment, widespread strikes over mortgage payments and continued Covid shutdowns that threaten to explode with severe social and political consequences.
The worsening collapse of the country’s indebted property market is at the heart of the problem, as the toxic $300billion (£250billion) debt triggered by last year’s collapse of development giant Evergrande slowly infects the whole economy.
The initial official response to the bank protest was to call in squads of plainclothes law enforcement to use violence to break it up. Authorities have since claimed the bank has been taken over by “criminal gangs” and promised to start allowing access to the money.
When it emerged last week that home buyers across the country were uniting to withhold mortgage payments on homes left unfinished by debt-ridden developers, it was another sign that ordinary Chinese people’s confidence in the market real estate and the wider banking sector was beginning. dissolve.
“Why do I have to pay a mortgage when the property I bought is not yet finished? said an angry social media user after watching a viral documentary about how hundreds of homebuyers in China’s central city of Xi’an have to live in unfinished apartments.
Under pressure, Beijing regulators pledged last Thursday to help local governments finish building projects on time. On Monday, the government reportedly proposed measures to allow landlords to temporarily suspend mortgage payments on unfinished property projects without affecting their credit ratings.
It’s a precarious time for China’s ruling Communist Party ahead of its 20th Party Congress later this year, as it signals a drop in confidence in a year that was supposed to prioritize stability, a said Diana Choyleva, chief economist at Enodo Economics, a macroeconomics consultancy in London.
“The refusal of buyers to pay mortgages on unfinished properties in cities across China and the mass protests in Henan by bank depositors demanding the return of their savings and condemning government corruption are another manifestation of the enormous challenges facing Beijing. is currently facing,” she said.
A broken business model
For years, real estate has been a key driver of China’s relentless growth, with prices rising steadily for decades and offering a seemingly one-sided bet to secure income growth for the new middle class. The Chinese real estate market represents about 30% of its economy.
However, this relentless expansion can no longer be taken for granted, as Friday’s weak GDP data showed. Repeated shutdowns of major cities to contain the Omicron variant of the coronavirus have taken their toll. Lanzhou, a city of nearly 4 million in northwest China, became the latest when it announced a week-long lockdown on Wednesday, as the threat of further paralysis looms in megacities such as Shanghai.
Beijing’s government has responded in recent weeks by hatching plans for another massive splurge on infrastructure projects worth up to $70 billion, a spending injection that could maintain the central committee’s prized growth figures. .
However, many economists and China watchers now agree that Beijing’s borrow-and-build economic model is broken and that more infrastructure is the road to ruin rather than a sustainable future. For many years now, Beijing has tried to turn to more consumer spending and innovation to drive a new era of growth rather than more steel and concrete white elephants. This, again, proved difficult.
The crisis affecting the real estate sector is a perfect illustration of this. The government has pulled every lever possible to contain Evergrande’s slow collapse, which began last year when the company admitted that ‘changing market conditions’ meant it could no longer repay its mountain of debt. debts.
The story has faded somewhat behind a quagmire of restructuring and absorbing troubled parts of the empire into state-owned enterprises, but even Beijing’s all-powerful bureaucrats can’t stop the poison from spreading, as Several key developments have shown this over the past week.
First, the Mortgage Rebellion shows that households have grown desperate as they watch unfinished homes bought off plan lose value as developers struggle to stay afloat. Figures from research firm China Real Estate Information Corporation suggest that mortgage strikes are affecting at least 100 residential real estate projects in 50 cities.
In a research note, Capital Economics said the strikes reflected concern over home completion “as well as some discontent with falling new home prices, which has left many buyers sitting on losses on paper”. He estimated that around 13 million apartments have been halted over the past year, indicating that some 4 billion yuan ($600 billion) of debt – or about 10% of the total – could be swallowed up in the crisis.
Second, home sales are still in the doldrums and show few signs of recovery amid Covid lockdowns, rising unemployment and uncertainty over the delivery of completed homes. Sales fell at a slower pace in May than in previous months but are off to a low, having plunged to their worst level since 2006. From January to May, home sales fell 23.6% from the same period the previous year.
Third, trouble is brewing in financial markets, where investors fear there are more corporate bankruptcies to come. The concerns sent the value of bonds sold by real estate companies plummeting last week, as well as real estate stocks on the Chinese stock market.
Ailing company Shimao this month missed a payment on a $1 billion bond, blaming “significant changes in the macro environment for the real estate industry”. Country Garden, the biggest developer of them all, has seen a bond due in 2024 fall to less than 50 cents on the dollar, according to data from Bloomberg.
Even mighty Shanghai-based Greenland, which has high-profile projects around the world including Pacific Park in Brooklyn and the Spire in London’s Canary Wharf, has been dragged into trouble. Last month, it was downgraded to “selective default” by ratings agency S&P Global, after extending the maturity of its $500 million bond by one year.
Questions are now being asked whether the country’s opaque banking system will be able to withstand the impact of bad debt on such a massive scale – especially as outrage grows among the population.
Loss of trustworthy
The protests are another sign of the loss of faith in the system that has created enormous wealth in China but now looks increasingly precarious. Many experts believe that the banking system will absorb the losses with the help of the central government, but the rapid deterioration of the balance sheets of local governments, whose sale of plots of land to developers has been the kick-starting engine for the country’s stratospheric growth. , is yet another area of concern. .
Dan Wang, chief economist at Hang Seng Bank in Shanghai, said policymakers in Beijing now faced a “tremendous dilemma” in solving the homebuyer crisis. “80% of residential housing in China was built with prepaid systems. So even if the central bank wanted to save the sector, it would be impossible to do so without lowering mortgage rates.
“They will also have to find ways to reduce the debt pressures of property companies without relaxing the official ‘three red lines’, a strict policy aimed at limiting the debt of property developers. It’s difficult.”
Although indebtedness varies from region to region, the crisis is severe enough that ratings agency S&P is warning that municipal China faces a “showdown” as land sales revenue plummets and that the massive cost of Covid lockdowns – local governments should take back the tab for mass testing – come home to roost.
“We calculate that 10% to 30% of local and regional governments will face prudential fiscal risk thresholds by the end of 2022,” analysts said, meaning they may not be able to repay their debts. debts and could be placed in special measures. by the central government.