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PoliticsWorldWhy Chinese real estate downturn worries world including rival countries

Why Chinese real estate downturn worries world including rival countries

Something awful happening in China has not quite disturbed the Asean world, Japan, India or even American people by and large since the time its hegemonic, expansionist and dangerous designs made it to the grapevines if not as news in the mainstream media. At the same time, developments like the outbreak of the coronavirus disease in mid-2019 — quite a few international spy agencies said it was either a biological weapon released deliberately or the pathogen leaked — as much as the US-China trade war during the Donald Trump years did concern the world. The Chinese economic downturn for the past few years has not cheered up the world either, as the US-led West had turned it into a hub of global manufacturing, thus connecting the entire humanity with what was once the Middle Kingdom. An aspect of the increasingly disappointing Chinese economy is its real estate sector, which is worrying the world now.

The troubled sector suffered another setback in July when frustrated homebuyers stopped making mortgage payments on units in unfinished housing projects. The boycott coincided with many developers' struggle to manage mountains of debt and a growing fear that the crisis could spread to the rest of the Chinese — and global — economy.

and related industries are estimated to contribute as much as 25% to China’s Gross Domestic Product (GDP).

Was Chinese real estate booming earlier?

Yes. The sector had taken off after the then-general secretary of the Communist Party of China (CCP), Deng Xiaoping, unleashed market reforms in 1998 while giving his people the mantra to strive to turn rich unabashedly. There was a breathtaking construction boom on the back of demand from a growing that saw as a key family asset and status symbol.

The bonanza was fuelled by easy access to loans, with banks willing to lend as much as possible to both developers and buyers.

What happened?

Mortgages make up almost 20% of all outstanding loans in Chinese banks, a report by ANZ Research this month said. Many developments rely on “pre-sales”, with buyers paying mortgages on units in projects yet to be built.

Unfinished homes in China amount to 225 million sq m of space, Bloomberg News reported.

As developers flourished, housing prices also soared. This worried the government, which was already concerned about the risk posed by debt-laden developers.

Now a liquidity crunch facing developers is spilling over to other aspects of Chinese society. 

The problem began in 2020 when Beijing launched the first crackdown on excessive borrowing by developers in a bid to rein in their high debt and curb runaway housing prices. The crisis escalated last year when Evergrande, the most indebted developer in China, scrambled to raise cash to repay lenders. As the sector cools off, several major companies are seeking protection from creditors. Many property projects across the country have been delayed or suspended due to developers' cash crunch.
Public anger is growing over stalled projects, as many homebuyers had started repaying mortgages before they are in possession of the new property. In China, real estate firms are allowed to sell homes before completing them and use the funds to finance construction. It's the most common way of selling houses in the industry.

Beijing launched a crackdown last year, with the central bank capping the proportion of outstanding loans to total lending by banks to try to limit the threat to the entire financial system. This squeezed sources of financing for developers already struggling to handle their debts. A wave of defaults ensued, most notably by China’s biggest developer, Evergrande, which is drowning in liabilities of more than $ 300 billion.

On top of the regulatory clampdown, Chinese firms were also hit by the Covid crisis — the economic uncertainty forced many would-be homebuyers to rethink their purchase plans.

Evergrande’s decline had sparked protests from homebuyers and contractors at its Shenzhen headquarters in September last year.

What is this people's boycott?

In June, a new form of protest emerged: the mortgage boycott. People who had bought units in still-unfinished projects announced that they would stop making payments until construction resumed. Within a month, the boycott spread to homebuyers in more than 300 projects in 50 cities across China. Many of the unfinished projects were concentrated in Henan province, where mass protests in response to rural bank fraud broke out and were suppressed.

Chinese lenders said last week that the affected mortgages accounted for less than 0.01% of outstanding residential mortgages, but analysts say the fear is how far the boycotts will spread.

Why is the world concerned?

China is the world’s second-largest economy, with deep global trade and finance links. If the crisis spreads to China’s financial system, the shock would be felt far beyond its borders, analysts say. “Should defaults escalate, there could be broad and serious economic and social implications,” Fitch Ratings wrote in a note on Monday.

This echoed a warning by the US Federal Reserve, which said in May that while China has managed to contain the fallout so far, a worsening crisis could impact the country’s financial system too.

The crisis could spread and impact global trade and risk sentiment, the Fed said in its May 2022 Financial Stability Report.

This distress could spread to parts of global markets like commodities and raw materials via import-export channels, as demand for constriction materials, automobiles, and machinery drops.

As China's domestic demand drops, economies that have the most exposure would hurt the most. Economies like Chile, Brazil, Australia, South Korea, Taiwan, Malaysia and Vietnam have the most exposure to their markets.

A crunch in the Chinese property market could result in unemployment, send the stocks plunging, and lead to deflation. All of these factors could pinch the global trade channels because China will have to eventually cut trade with other countries to some extent. China is intertwined with the global economy and a crash there could bleed into other countries.

Can't the Chinese real sector be bailed out?

A bailout or rescue fund for the entire property sector is unlikely, even as mortgage boycotts mount, analysts say, as those would mean the government is admitting to the scale of the crisis.

A major bailout may also encourage developers and home buyers to continue with risky decisions as they would see the government and banks taking on responsibility.

But pressure has been building on Chinese banks to help ease the situation. China’s banking regulator said Thursday that it would help ensure that projects are completed and units handed over to buyers.

Some intervention has happened at the local level in Henan province, where a bailout fund was set up in collaboration with a state-backed developer to help stressed projects.

Chen Shujin at Jefferies said local governments, developers and homeowners might also be able to negotiate interest waivers and suspension of mortgage payments for a certain period on a case-by-case basis.

The China Banking and Insurance Regulatory Commission (CBIRC) reiterated Thursday that it will provide "active credit support" for property developers, so they can complete delayed or stalled projects as soon as possible, reported CNN. The commission urged banks to issue more mortgage loans to qualified homebuyers to support demand and prop up the property market.

The regulator said previous efforts to boost property lending have been working. Mortgages have increased after the People's Bank of China cut mortgage rates by two-tenths of a percentage point in May for first-home buyers. Substantially all — 90% — of mortgage loans have been issued to first-home buyers. "The current lending pace for property-related loans has reached the fastest pace since 2019," said Liu Zhongrui, an official from the CBIRC, at a press conference on Thursday in Beijing.

Last month, new developer loans issued by banks also reached 52.2 billion yuan ($7.7 billion), Liu added.

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Surajit Dasgupta
Surajit Dasguptahttp://''
Co-founder and Editor-in-Chief of Sirf News Surajit Dasgupta has been a science correspondent in The Statesman, senior editor in The Pioneer, special correspondent in Money Life, the first national affairs editor of Swarajya, executive editor of Hindusthan Samachar and desk head of MyNation


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