China: Real Estate Crisis Exposes Reality Of Beijing’s Property Boom

Beijing [China]: The property crisis in China, which has led to billions of dollars flowing out of the country, is not just Beijing’s own making but has also exposed the ‘reality’ of Beijing’s property boom, New York Times reported.

What started three years ago as a crackdown on risky business behaviour by home builders, and then an ensuing housing slowdown, has spiralled rapidly this month.

The broader economy has been threatened, and the confidence of consumers, businesses and investors has been undermined. So far, China’s typically hands-on policymakers have done little to ease anxieties and seem determined to reduce the country’s economic reliance on real estate.

“What is happening in the Chinese property market is really unprecedented,” NYT quoted Charles Chang, who heads corporate credit ratings for Greater China at Standard & Poor’s.

For the last three decades, China’s population surged and its people flocked to cities seeking economic opportunity. The developers couldn’t build modern apartments fast enough, and the property sector became the engine of a transforming economy.
Real estate employed millions and provided a store for household savings. Today, the property sector accounts for more than a quarter of all economic activity.

China’s dependence on real estate was lucrative during its strong phase when it seemed like a never-ending property boom, but today it has become a liability after years of excessive borrowing and overbuilding, as per NYT.

When China was growing faster, the excesses were papered over as developers borrowed more to pay off mounting debts. But now China is struggling to regain its footing after emerging from the “paralyzing pandemic lockdowns” its leaders imposed, and many of its economic problems are pointing back to real estate, NYT reported.

Today, Chinese consumers are spending less, in part because a slump in housing prices has affected their savings, much of which are tied up in property. Jobs tied to housing that were once abundant — construction, landscaping, painting — are also disappearing.

In addition to all this, the uncertainty of how far the crisis might spread is leaving companies and small businesses further afraid to spend.

Financial institutions known as trust companies, which invest billions of dollars on behalf of companies and rich individuals, are staring at losses from risky loans handed out to property firms, prompting protests from angry investors, NYT reported.
As per the New York Times, the current property crisis is a problem of the government’s own making.

The regulators allowed developers to gorge themselves on debt to finance a growth-at-all-costs strategy for decades. Then the government intervened suddenly and drastically in 2020 to prevent a housing bubble. It stopped the flow of cheap money to China’s biggest real estate companies, leaving many short on cash.

One after another, the companies began to crumble as they could not pay their bills. More than 50 Chinese property developers have defaulted or failed to make debt payments in the last three years, NYT reported citing credit ratings agency Standard & Poor’s.

The defaults have exposed the ‘reality’ of China’s property boom: the borrow-to-build model works only as long as prices keep going up.

However, even as the property crisis has worsened, Chinese policymakers have defied calls to step in with a major rescue package. Instead, they have opted for modest gestures like relaxing mortgage requirements and cutting interest rates.

NYT cited an editorial of the state-run Economic Daily, which stated on Friday that it would take time for recent policies to take effect: “We must be soberly aware that the process of defusing risk cannot be completed overnight, and the market must give it a certain amount of patience.”

The policymakers have tolerated the fallout of the real estate crackdown because even the companies that aren’t able to pay all their bills have continued to build and deliver apartments.

China Evergrande, for example, defaulted on 300 billion UYD of debt in 2021 and yet managed to finish and deliver 3,00,000 apartments out of the more than 1 million that it had taken money for but not completed at the time of its collapse, New York Times reported.

Evergrande filed for bankruptcy protection in the United States on Thursday.
However, a lot has changed in recent months. Households pulled back on big purchases, and apartment sales abruptly plummeted. This shock altered the fortunes of Country Garden, a real estate giant that was once put forward as a model by the government.

The company is now anticipating a loss of as much as 7.6 billion USD in the first half of the year and said that it is facing the “biggest challenge” to its business in its three-decade history, NYT reported.

Country Garden has just weeks to come up with the cash to make interest payments on some of its bonds or join its peers in default. It also has hundreds of billions of dollars in unpaid bills.