China’s housing bubble amid crippling debt crisis


The real estate sector represents 29% of Chinese GDP.

In the era of reforms, China has experienced unprecedented economic growth and seen the emergence of a “middle class” (中产阶级), estimated at over 400 million, according to the 2019 White Paper on new Chinese middle class” (新中产阶级). . The “new middle class”, expected to number 200 million, has a decent annual income of more than 100,000 yuan and lives mostly in China’s tier one and tier two cities. The middle class has been a driving force behind consumption in China and interestingly owns around 70% of the collective wealth in real estate. For the “New Middle Class”, the ratio is given at 56% by the white paper. In recent years, due to bad debts from real estate developers, strict Covid-19 lockdowns, national and global economic crisis, the risk of depending on real estate investment becomes dangerous. The sector has increasingly come under the party-state scanner for irregularities, corruption, delivery failures and a severe debt crisis.

It all started with the Evergrande (恒大) fiasco at the end of 2021, but snowballed in June 2022, when the same company published a notice that the Evergrande Longting project in the city of Jingdezhen, in the province of Jiangxi, had been completely suspended due to unavailability of funds. The crisis also engulfed the banks; many have frozen their customers’ deposits, as has been the case in Henan and Nanjing, leading to protests and slogans outside banks. Worse, customers of the “early housing delivery system” (期房制) have suspended mortgage repayments (停贷) and some are taking legal action. China 21st Century Business Herald 《21世纪经济报》reported that as of July 14, more than 230 property owners across the country collectively suspended mortgage payments for unfinished projects (烂尾楼) in Beijing, Shanghai, Henan, Hebei, Hubei, Hunan, Jiangxi, Guangxi, Shanxi , Liaoning, Anhui , Fujian, Jiangsu, Yunnan, etc., cities and provinces, a clear indication that the trend is spreading from tier one to tier two and three cities. Shares of all 40 banks fell 2% [in some cases by 3%], sending shockwaves through China, especially at a time when provincial governments are deeply in debt to the tune of more than $4 trillion. Nearly half of the unfinished buildings belong to the Evergrande, which alone has more than $300 billion in debt. Other developers such as Aoyuan, Xinyuan, Xinli, Sunshine City, Shimao, Greenland etc. have also suspended their projects.

The real estate sector represents 29% of Chinese GDP. The sector has contributed to unprecedented infrastructure growth, urbanization as well as the growth of related ancillary industries such as glass, cement, steel, household appliances, etc., although there are also had cases of so-called ghost towns. The last decade (2011-2020) has seen exponential growth in the sector: prices have doubled, sales have tripled and the total area sold has increased by 60%. According to a report by yicai, new home sales totaled 15.5 trillion yuan (about $2.2 trillion) in 2020, seven times the US new home sales in the same year. The housing bubble gave rise to speculation, as China’s middle class borrowed heavily to buy homes. According George Magnus, household debt has risen from around $2 trillion in 2010 to over $10 trillion in 2021, with the debt-to-disposable income ratio reaching around 130%. In addition, in order to limit the borrowing of real estate developers, the Chinese government has issued the “three red lines” (三条红线): a debt ratio of 70% or less, a ceiling of 100% of net debt on equity and enough cash to meet short-term borrowings, debts and liabilities, adding insult to injury. In addition, the Covid “dynamic zero” policy, the global economic crisis, the Ukraine-Russia conflict, etc., dampened the interest of real estate companies, as they ran out of money and could not complete the projects. underway, at least to speak of their enthusiasm for new projects. This has raised global concerns, as China’s real estate market is closely linked to the global market through commodity imports and development finance.

Undoubtedly, stressed mortgage owners are the biggest victims, however, the systemic financial risks faced by banks are real, as undelivered projects can only become bad debts, which in turn is likely to shake up China’s domestic financial system. Will this be Lehman Brothers’ time in China? Maybe not. Banks in China are owned by the state, just like the land. On July 14, more than 10 banks, including the six main public banks, issued statements in response to the suspension of mortgage repayments. The Industrial and Commercial Bank of China and the Agricultural Bank of China revealed that the currently suspended projects relate to non-performing loans of 637 million yuan and 660 million yuan respectively, representing 0.01% and 0.012% of their mortgage loans. The Bank of Communications disclosed it at 99.8 million yuan, which is 0.0067% of its domestic housing mortgages. Others, such as the Bank of China and China Construction Bank, did not disclose specific data from their mortgage businesses, but both said the scale involved was limited and the overall risk was controllable. Most banks said they have established a comprehensive coordination mechanism and investigations at all levels on the “guaranteed handover” (保交楼) of housing projects. People may not have forgotten the case of Baoshang Bank in Inner Mongolia, which had a non-performing loan rate of 1.68% in 2016, but jumped to 98% in 2020, the year it was dissolved by the Chinese government.

Moreover, it was reported that the “suspended works area” (停工面积) accounts for about 5% (about 500 million square meters) of the industry’s construction area of ​​9.7 billion square meters. The report posits that even if mortgage assets due to unfinished projects reach a high of 2%, the absolute number will still not be very high. Nevertheless, there is a counter-argument that even though the proportion involved is less than 1 in 10,000, the owners involved are in the tens of thousands. Under such circumstances, the collateral damage of suspending mortgages will obviously be terrifying. However, since banks are public entities, they have nothing to fear; developers have made enough money and are flat (躺平) in a downturn; it is the middle class, the weakest link in the ecosystem of banks-developers and customers, who have lost confidence in the Chinese banking system, not to mention the cities strewn with the scars of unfinished projects. Whether planned launch of a 300 billion yuan ($44 billion) real estate fund will help real estate developers emerge from the debt crisis or not and restore the confidence of the middle class in the real estate market, only time will tell .

BR Deepak is a professor at the Center for Chinese and South Asian Studies at Jawaharlal Nehru University in New Delhi.


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