(BEIJING) – Developers drowning in debt and buyers who stop paying monthly payments: the real estate sector in China has been going through a crisis for months that could impact the entire economy of the country and, therefore, the entire world.
How much does the sector weigh in China?
Very much. In its broadest definition, the real estate sector represents a quarter of China’s Gross Domestic Product (GDP).
China’s accommodation reform in 1998 created a real market that grew dramatically. Among the reasons, some are cultural, such as the fact that buying a house is often a prerequisite for getting married.
In addition, the banks granted copious credits to both developers and buyers.
Still today, real estate loans represent about 20% of loans in the Chinese banking system, according to a report by ANZ bank.
Developers work most of the time with a pre-sale system in which assets are sold before construction begins.
So the country has 225 million square meters of accommodation to finish, according to the financial information agency Bloomberg.
What is the origin of the crisis?
The multiplication of developers was accompanied by an increase in prices, which worries the government because many citizens no longer have the means to access property.
Another point of concern is the massive indebtedness of the promoters.
To reduce the debts of the sector, China toughened in 2021 the conditions of access to credit for developers, cutting off a financing channel. And it triggered a wave of defaults.
The most important case was that of the former number one in the sector, Evergrande, with nearly 300,000 million dollars in debt.
Furthermore, the uncertainty linked to the COVID-19 pandemic is deterring buyers.
How do buyers react?
The Evergrande crisis sparked buyer demonstrations in September 2021, but a new form of protest appeared in June: a real estate loan payment strike.
Given the delays in the works, the buyers of accommodations that are not yet finished stopped paying the credits until the works are resumed.
Within a month, the strike spread to more than 300 projects in 50 cities in China.
Should the world worry?
Given the interconnection of China, the second world economic power, with the rest of the countries, a contagion of the real estate crisis to the financial sector would have international repercussions, according to analysts.
“If defaults multiply, it could have serious economic and social consequences,” warns the Fitch rating agency.
Already in May, the US Central Bank stated that the worsening of the Chinese real estate crisis could have consequences for the country’s financial system.
In such a scenario, the crisis would impact world trade, says Fitch.
Solutions?
Analysts consider that it is unlikely that there will be a rescue plan for the sector.
Since such an operation would affect “all the risk in the banking sector or in the government”, highlights Ken Cheung, an analyst at the Japanese bank Mizuho.
And it could cause an effect contrary to what was sought.
Faced with state intervention, property owners and developers would be tempted to forget their responsibilities and stop paying, Cheung explains.
Local administrations, promoters and owners could negotiate, on a case-by-case basis, exemption from interest or deferrals of monthly payments, predicts analyst Chen Shujin, from the American investment bank Jefferies.
