A prominent property developer in China is on the brink of default, as one of the country’s largest asset managers has struggled to make payments to investors and billions of dollars have flowed out of the stock markets. The situation in China has been turbulent in recent weeks, with the crackdown on risky behavior in the real estate sector causing a rapid spiral of economic threats and undermining confidence. The Chinese government, typically proactive in managing the economy, has done little to ease anxieties and appears determined to reduce the country’s reliance on real estate.
The current crisis in the Chinese property market is unprecedented, according to Charles Chang, Head of Corporate Credit Ratings for Greater China at Standard & Poor’s. For decades, the property sector has been the driving force behind China’s economic transformation, employing millions of people and serving as a store of household savings. However, the country’s dependence on real estate has become a liability due to excessive borrowing and overbuilding. The economic fallout from the pandemic and the slump in housing prices have had a significant impact on Chinese consumers, who are now spending less. Jobs in the housing sector, such as construction and painting, are disappearing, and the uncertainty surrounding the crisis is causing companies and small businesses to hold back on spending.
The Chinese government is partially responsible for the current property crisis. Regulators allowed developers to accumulate massive amounts of debt to fuel growth, and then abruptly intervened in 2020 to prevent a housing bubble. This sudden change in policy cut off cheap financing for major real estate companies, leaving many cash-strapped and unable to pay their debts. Over the past three years, more than 50 Chinese property developers have defaulted or failed to make debt payments, exposing the flaws in China’s borrow-to-build model.
Despite the worsening property crisis, Chinese policymakers have chosen not to implement a major rescue package and have instead made small gestures like relaxing mortgage requirements and cutting interest rates. The state-run Economic Daily acknowledged that defusing the risk would take time but urged patience from the market. Policymakers seem willing to tolerate the fallout from the crackdown, as even companies that struggle to make payments are still able to build and deliver apartments.
However, recent months have seen a significant change in the market. Household purchases have declined, and apartment sales have plummeted. This has had a profound effect on companies like Country Garden, which was once seen as a model for the industry but is now facing a potential loss of up to $7.6 billion and has unpaid bills totaling hundreds of billions of dollars. These developments have made homebuyers even more cautious, leading to a decline in new home sales.
Investors are growing increasingly concerned that policymakers are not acting quickly enough to prevent a more significant crisis. Falling home sales and defaulting developers have the potential to trigger a chain reaction that could threaten the broader economy. These fears have spread to other markets, including Hong Kong, where Chinese stocks have fallen 21 percent from their peak in January, resulting in stocks entering a bear market. Investors have also withdrawn $7.5 billion from Chinese stocks in the past two weeks.
The real estate troubles are also affecting China’s shadow banking system, particularly financial trust companies. These institutions offer higher investment returns and often invest in real estate projects. Earlier this month, two publicly traded Chinese companies revealed that they had invested money with Zhongrong International Trust, a major shareholder in several defaulting property projects, and had not received their payments. The situation has caused anger among investors, leading to protests and demands for explanations.
The Chinese government has faced similar acts of defiance in the past related to the housing crisis, such as retirees protesting cuts in government-provided medical insurance and homeowners refusing to pay mortgage loans on unfinished apartments. These protests gained attention but ultimately lost momentum due to government intervention. With the current situation, it remains to be seen how the government will respond and whether further protests will occur.
In conclusion, China’s property market is experiencing an unprecedented crisis, with a major developer on the verge of default, asset managers struggling to make payments, and billions of dollars exiting the stock markets. The government’s crackdown on risky behavior and its reluctance to intervene significantly have caused economic threats and undermined confidence. The country’s dependence on real estate, once a driving force behind economic growth, has become a liability due to excessive borrowing and overbuilding. Falling home sales and defaulting developers are raising concerns among investors and could trigger a chain reaction that threatens the broader economy. The troubles in the real estate sector are also impacting China’s shadow banking system, and there is a growing sense of frustration among investors. The Chinese government’s response and the actions of protesters will be crucial in determining the outcome of this crisis.
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