- by cnn
- 17 Apr 2024
The property sector in the Chinese economy has always been something of a puzzle. At its peak, it accounted for a quarter of the nation's economic output, broadly measured. And it sees people in Beijing and Shanghai paying house prices similar to those in San Francisco and New York, despite having just a quarter the income of American buyers.
Now many believe that we are about to see a violent contraction of the property market in China. The government wants to intervene to curb speculation, and rein in what it calls the "three high" problem: high prices, high debt and high financialisation. The approach has been nothing short of dramatic. Financing for property developers has tanked. Earlier this year, property sales declined by as much as 20-30%, in-progress developments are not being completed and people have taken to the streets, banding together to stop mortgage payments on such projects in protest.
Many of China's largest property developers are failing to repay their debts. Even the survivors are cash-strapped and in a liquidity crisis. The risk is that the property market crisis will drag the broader economy down with it, hitting suppliers, small- and medium-sized companies in construction, as well as household consumption. And dangerously, the banking system has at least a quarter of its assets in property.
What is currently needed is a backstop to the self-fulfilling crisis: the belief that property developers will be insolvent impels buyers to hold off their purchases and financing to dry up. Some monetary easing and relaxation in the mortgage market is not enough: stimulating demand by loosening mortgage lending won't solve the problem and a proposed bailout package will probably not move the needle. The government would need to offer much more relief to property developers, despite their past unscrupulous behaviour. To break the cycle, the government will need to send a much stronger message and instil confidence.
The short-term pressure on the Chinese economy is real, but China is not about to experience a severe housing crisis. For one, Chinese households historically have very high rates of savings, which should allow them to address interest payments relatively easily. This is not a situation like in the US or Europe in 2008, which saw highly indebted homeowners unable to make their basic payments.
And pent-up demand for housing is still there: rapid urbanisation means that new residents will want a place in the city; in a gender-skewed country with a highly competitive marriage market for men, bachelors become more "eligible" when in possession of a property.
Nor is a full-blown financial crisis likely. Major banks are state owned, and will not be allowed to fail. There are no complex, opaque chains of intermediation that characterise the western banking system. Foreign creditors to Chinese property developers will have to take a massive haircut, but the ripple effect on the international economy is likely to be limited. Foreign players have limited exposure to Chinese assets in general: today, less than 5% of Chinese equities and bonds are held by foreigners. This is unlike mortgage-backed securities, where the whole world was exposed leading up to the 2008 financial crisis.
Premier announces changes to long-delayed project
read more