China’s real estate sector is facing a severe crisis, prompting the government to encourage financial institutions to support struggling developers burdened by massive debt. The dilemma for Beijing lies in defusing local government debt risks while propping up the real economy to sustain growth. This critical situation highlights the intricate dance between economic stability and social harmony, as the housing issue is closely tied to both. The government’s recent call for support underscores the gravity of the situation, especially with major developers like China Evergrande on the verge of collapse. The future looks bleak for China’s real estate sector. Even government support may not be enough to ameliorate this crisis.
2. China’s property developers, drowning in debt, are unable to complete pre-sold homes for hundreds of thousands of homebuyers. The largest among them, China Evergrande, holds the dubious title of the world’s most indebted developer with over US$300 billion in liabilities. Its default two years ago has left a lingering impact, and a looming December 4 deadline for a repayment plan adds urgency to the situation. However, Evergrande is not alone; Country Garden and Sunac are also facing financial turmoil, amplifying the crisis.
3. The real estate crisis is more pronounced in tier-two cities and below, where 841 demonstrations against property developers have occurred since January 2022. These protests, primarily led by homebuyers demanding the delivery of their properties, reflect the deep-rooted issues in the sector. Construction workers, seeking overdue salary payments, have also added to the unrest. The crisis has broader implications, as the property market is a significant driver of economic growth and a major source of revenue for local governments.
4. China’s local governments heavily rely on land sales for real estate projects to boost their revenues. However, the current crisis is adding pressure to already strained local government fund vehicles, issued for infrastructure projects like roads and airports. The escalating debts are fueling concerns of a potential systemic financial crisis. The International Monetary Fund predicts that government debts will account for 83% of China’s GDP in 2023, up from 77% last year, raising red flags about the sustainability of the country’s economic model.
5. In response to the escalating crisis, Premier Li Qiang’s Central Financial Commission emphasizes the need to improve financial services for economic development. The commission calls for comprehensive measures to strengthen financial supervision, manage risks, and coordinate among departments. The goal is to control the diffuse sources of risk and implement reforms to enhance prevention, warning, and management mechanisms.
6. The International Monetary Fund’s Mission Chief for China, Sonali Jain-Chandra, emphasizes the need for additional measures to secure a recovery in the property market. These measures include accelerating the exit of troubled developers and increasing central government funding for housing completion. Analysts estimate that approximately 20 million units of unconstructed and delayed pre-sold homes across the country pose the most significant obstacle to resolving the property crisis. An estimated $440 billion will be needed to complete their construction.
7. The property crisis is taking a toll on China’s broader economy, with financial well-being at the local government level directly impacted. S&P Global forecasts a potential 15% drop in China’s property sales this year, with a more moderate decline of 5% expected in 2024. The continued slump in the property market threatens the post-COVID recovery of the world’s second-largest economy, where real estate and related industries constitute about 30% of the GDP.
8. In response to the crisis, Beijing has ramped up measures to prop up the economy, including a recent announcement of a 1 trillion yuan government bond issuance. Observers are keenly awaiting indications of Beijing’s macroeconomic direction for 2024 at the upcoming annual Central Economic Work Conference. Experts anticipate continued signals prioritizing support for private consumption, financial risk mitigation, fiscal support, and further opening up of the economy. However, questions linger about the feasibility of achieving ambitious growth targets in the face of a challenging economic landscape. 9. China’s real estate crisis poses a formidable challenge to the country’s economic stability and social cohesion. The delicate balance between defusing debt risks and sustaining growth underscores the complexity of the situation. As the government grapples with the fallout, the global community watches closely, aware of the potential ripple effects on the world’s economy. The road to recovery will require not only financial support but also comprehensive reforms to address the root causes of the crisis and ensure a more resilient and sustainable future for China’s real estate sector.