China has become more than ever vulnerable to major economic troubles as the real estate crisis has deepened further after property giant Country Garden defaulted on an international bond. This is a serious blow to China’s economy amid falling home prices, and sluggish property sales as well as to average Chinese people who face massive losses.
Country Garden has USD 190 million in liabilities. It expressed its inability to pay up to USD 15.4 million in dollar bonds, and thus heading to one of China’s biggest-ever restructurings. The real estate major still has in progress 3,000 housing projects and about 70,000 employees, which will have a major bearing on the Chinese economy.1
Earlier, another Chinese property giant Evergrande Group reported liabilities of over USD 300 billion, becoming the world’s most indebted property developer.2 The property crisis has created problems for Xi Jinping-led government as it continues to drag the economy down.
According to JP Morgan, Chinese developers that are responsible for 40 percent of home sales have defaulted on their loan obligations since 2021.3 “I think it’s a really high-profile and visceral reminder of just how bad things are for the developers, but the private-sector developers in particular,” said Chris Beddor, deputy director of China Research at Gavekal Dragonomics.4
Overall property sales and investment have registered a massive decline of 20 percent in year-on-year.5 In the third quarter of 2023, the value of output by the real estate sector contracted by 2.7 percent.6 Similarly, home prices continued to drop as they went down by 0.30 percent from August to September.7
Owing to the property crisis, the World Bank has lowered its 2024 GDP growth rate for China from 4.8 percent to 4.4 percent.8 International Monetary Fund (IMF) has reduced it further to 4.2 percent.9 Larry Hu, head of China economics at Macquarie Group, said “Looking ahead, the main risk still comes from the property sector, which is not out of the woods yet.”10
Many people in China suffered due to the property sector bust. A Chinese person named Gary Meng took a dig at Xi and the Communist Party of China. “In the past, I believed in the government and the party and the country. Now I can only say that I am quite bitterly disappointed,” he said.11
Now, Chinese homebuyers are agitated as they believe the defaults by the developers would lead to the suspension of construction work on the homes they invested in. A Chinese citizen named Fu said “I don’t care if they’re in crisis,” he said. “I want the blood-and-sweat money I earned.”12
Rory Green, chief China economist at TS Lombard, said the Chinese government did not have a proper plan for affordable housing and measures to address the demand-supply imbalance. “It’s simply very difficult to suddenly shift the growth model and try to reallocate resources away from property . . . particularly when it has massive asset linkages to household and to local governments, and to the entire financial system,” he said.13
Experts blamed the ineffective policies of the Beijing government for the property disaster.14 Xi had come up with the “three red lines” policy in 2020, which imposed strict debt and cash-flow targets on developers. This led many Chinese developers to default as the funding was curtailed. However, there are speculations that someone will be made a scapegoat to take the blame for the property fiasco.15
About 70 percent of debt defaults in recent quarters in China are by the property sector. “As property woes worsen, China will likely see more defaults in its financial ecosystem,” said Raymond Yeung and Xing Zhaopeng, economists at Australia & New Zealand Banking Group 16 Real estate, which threatened the financial and economic stability of China, has become a major roadblock to the recovery of the country’s economy which is expected to remain under the weather for a long time.17 Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, said a slow but painful adjustment is the only way out for China. The adjustment has only started and will take years to conclude,” she said. “Expect China to be shaving off around one and a half percentage points of growth every year, at least until 2026.”