Tremors in the Chinese real estate market are shaking the country’s economy, as well as the world, which has come to rely on China as a reliable engine of growth.
Major developers are faltering as they face huge losses, grapple with mountains of debt and miss payments to lenders. The long-running construction boom that drove Chinese growth has stalled, threatening the jobs and savings of millions of families. China’s markets fell and its currency weakened as officials took measures to stimulate growth.
Here’s what you need to know:
What is going on with real estate and the Chinese economy?
For decades, the Chinese economy relied on a booming real estate sector fueled by population growth. The housing market created jobs and served as a place to store wealth for China’s growing middle class. Local governments also relied on revenue from land sales.
But the country’s population isn’t growing the way it used to, and years of strict Covid-19 restrictions have rattled Chinese consumers. The government has also cracked down on risky practices in the industry, a combination that has left property developers with massive debts and more new housing units than buyers.
Home prices have plummeted, denting the savings and confidence of Chinese households as the government attempts to transition from an economy powered by state-directed investment and exports to one led by domestic consumer spending.
How bad is that?
According to one estimate from Gavekal Research, outstanding bills from private Chinese developers total $390 billion, a huge looming threat to the economy.
Economists have lowered their forecasts for economic growth in China, many of them to below the government’s target of about 5%.
Both imports and exports have fallen in recent months, and foreign investment in the country fell by more than 80 percent in the second quarter from a year earlier. China’s consumer prices fell in July for the first time in two years, a sign that Chinese households are spending less.
The Hang Seng Index of Hong Kong-listed shares entered a bear market on Friday, dropping more than 20 percent from its January high.
What companies are at the heart of the crisis?
Country Garden, China’s largest real estate developer, said this month that it expects to post a loss of up to $7.6 billion for the first six months of this year. The company’s share price has plummeted as investors fear it could default on billions of dollars in loans.
China Evergrande, another major real estate developer, recently filed for US bankruptcy as it restructures its debt. The company defaulted on $300 billion in debt in 2021, one of the first major signs that China’s real estate industry was in trouble.
The sector’s problems also spread to China’s financial credit companies, which offer investments with higher returns than standard bank deposits and often invest in real estate projects.
Zhongrong International Trust, which manages about $85 billion in assets, recently failed to make payments to investors. Video clips circulated on social media showed a crowd of investors protesting outside the company’s offices in Beijing, demanding that the company pay them.
What is the Chinese government doing about all this?
Chinese regulators began cracking down on reckless borrowing in 2020, forcing companies to reduce their debt levels before taking on more debt.
This led to trouble for heavily indebted developers such as Evergrande and Country Garden. According to Standard & Poor’s, more than 50 real estate developers in China have failed to make payments in the past three years.
The government recently outlined programs aimed at stimulating spending and investment, but the details have been fuzzy.
China’s central bank on Monday lowered its one-year loan rate, which is used for most corporate loans, but left the five-year rate, used for pricing mortgages, unchanged. Economists were expecting more aggressive moves.
What is the potential impact of China’s problems on the global economy?
Over the past decade, China has been the source of more than 40 percent of global economic growth, compared with 22 percent for the United States and 9 percent for the eurozone, according to BCA Research.
Lower consumer spending in China is hurting companies that do business there, such as US technology firms and European luxury goods groups. A weaker Chinese economy also means less appetite for oil, metals and other building blocks of industry. China is one of the largest trading partners of the United States, buying billions of dollars in American crops and machinery each year.
However, the reaction of global investors has been relatively muted so far. The S&P 500 recently fell for three straight weeks amid signs of malaise in the Chinese economy, but has remained higher for the year, driven by big tech companies. Investors in the US and Europe have also been preoccupied with their national central banks’ next steps on interest rates as their countries face stubborn inflation.
Contribute to the preparation of reports Keith BradshareAnd Peter S. GoodmanAnd Alexandra Stephenson And Daisuke Wakabayashi.