A typical Chinese property developer in a sector full of risk-takers is teetering on the brink of default. Short of liquidity, one of China’s largest asset management firms has defaulted on payments to investors. Billions of dollars have poured in from the country’s stock markets.
In China, August was an amazing journey.
What began three years ago as a crackdown on risky business behavior by homebuilders, and then subsequent housing slowdown, has escalated rapidly this month. The broader economy has been threatened, and the confidence of consumers, businesses and investors has been undermined. So far, China’s usually pragmatic policymakers have done little to ease anxiety and seem intent on reducing the country’s economic dependence on real estate.
“What’s happening in the Chinese real estate market is really unprecedented,” said Charles Zhang, who heads the Greater China corporate credit rating at Standard & Poor’s.
Over the past three decades, as China’s population soared and residents flocked to cities in search of economic opportunities, developers couldn’t build modern apartments fast enough, and the real estate sector became the engine of a transforming economy. Real estate employed millions and provided a storehouse of family savings. Today, the real estate sector accounts for more than a quarter of all economic activity.
China’s reliance on real estate has been profitable during what seemed like a never-ending real estate boom, but has become a liability after years of excessive borrowing and overbuilding. When China was growing faster, excesses were covered up as developers borrowed more to pay off mounting debts. But China is now struggling to regain its footing after emerging from the crippling pandemic lockdown imposed by its leaders, and many of its economic woes point to real estate.
Chinese consumers are spending less, in part because the slump in home prices has affected their savings, many of which are tied up in real estate. The housing-related jobs that were once available—building, landscaping, painting—are disappearing. Uncertainty about how far the crisis could spread is making businesses and small businesses fearful of spending.
Local governments, which depend on land sales to developers to pay for municipal programs, reduce services.
Financial institutions known as trust companies, which invest billions of dollars on behalf of corporations and wealthy individuals, are staring at losses from risky loans to real estate companies, prompting protests from angry investors.
The current real estate crisis is a government-made problem. Regulators have allowed developers to go into debt to fund a growth-at-all-costs strategy for decades. Then they suddenly and drastically intervened in 2020 to prevent a housing bubble. They have stopped the flow of cheap money to China’s largest real estate companies, causing many companies to run short of liquidity.
One by one, businesses began to collapse because they were unable to pay their bills. More than 50 Chinese real estate developers have defaulted or failed to pay their debts in the past three years, according to credit rating agency Standard & Poor’s. The defaults exposed the reality of China’s real estate boom: the borrow-to-build model only works as long as prices keep rising.
As the real estate crisis worsens, Chinese policymakers have defied calls to intervene with a major bailout package. They opted instead for modest gestures such as easing mortgage requirements and lowering interest rates.
In an editorial on Friday, state-run economic daily It will take time for the latest policies to take effect, he said: “We must be well aware that the process of de-risking cannot be completed overnight, and the market must give it a certain amount of patience.”
Policymakers bore the fallout from the real estate crackdown because even companies unable to pay all their bills continued to build and deliver apartments.
China Evergrande, for example, defaulted on $300 billion in debt in 2021, yet managed to finish and deliver 300,000 apartments out of the more than a million it had been paid for but not completed at the time of its collapse. Evergrande filed for bankruptcy protection in the US on Thursday.
But a lot has changed in recent months. Families backed out on big purchases, and condo sales fell surprisingly low. That shock changed the fortunes of Country Garden, the real estate giant once offered up as a model by the government. The company now expects a loss of up to $7.6 billion in the first half of the year and says it faces the biggest challenge to its business in its three-decade history.
Park State has just weeks to come up with the money to make interest payments on some of its bonds, or join its peers in the event of a default. It also has hundreds of billions of dollars in unpaid bills.
These developments spooked homebuyers, who were already worried. In July, sales of new homes at China’s 100 largest real estate developers fell 33% from a year earlier, according to data from China Real Estate Information Corp. Sales also fell 28% in June.
Investors worry that policy makers are not acting fast enough to prevent a larger crisis.
“I don’t think they’ve come up with the right solution to solve the problems yet,” said Ting Lu, chief China economist at Nomura. He and his colleagues warn that falling home sales and faltering developers risk a chain reaction that threatens the broader economy.
Fears spread to other markets. In Hong Kong, where many of China’s largest companies are registered, confidence has fallen so badly that stocks have slipped into a bear market, down 21 percent from their peak in January. Over the past two weeks, investors have withdrawn $7.5 billion from Chinese stocks.
Real estate problems also spread to the so-called shadow banking system of financial credit companies in China. These institutions offer investments with higher returns than standard bank deposits and often invest in real estate projects.
The latest problems appeared earlier this month. Two publicly traded Chinese companies that have invested money with Zhongrong International Trust, which manages about $85 billion in assets, have warned that Zhongrong has failed to pay what it owes. While it was not clear that these investments were related to real estate, Zhongrong was a major shareholder in several real estate projects of backward developers, according to Southern China Morning Post. Zhongrong did not respond to an email seeking comment.
A crowd of angry Chinese investors gathered outside Zhongrong’s offices in Beijing, demanding that the company “pay the money back” and demanded an explanation. It was not clear when the protest would take place. His videos were uploaded to Douyin, the Chinese version of TikTok, this month.
The demonstration was reminiscent of other acts of defiance in China that are rooted in the housing crisis. While such incidents are rare, there are some recent examples.
In February, thousands of retirees in Wuhan confronted officials to protest cuts in government-provided medical insurance for the elderly. The cuts were a sign of pressure on local governments caused in part by a decline in real estate that has hurt land sales, a reliable source of revenue.
Last year, hundreds of thousands of homeowners refused to pay mortgages on unfinished apartments. Some have organized protest videos on social media, while homeowner groups have tracked boycotts online.
The protests drew attention, but the momentum faded as the government stepped in to limit discussion on social media, while adopting some steps to ease tensions. Last week, new video outside Zhongrong’s offices showed there were no demonstrations, but police cars and vans parked at and near the facility.
Claire Fu And me you Contribute to the preparation of reports.