China’s property downturn sends a chill to the economy

Until just a few weeks ago, sales increased in three residential developments in the eastern Chinese city of Jinan. But in September, one of the busiest months for homes to buy a new home, the mood turned sour.

Sales on projects are flat or declining because authorities tighten access to mortgages, and developers are now discounting attempts to relocate units – even if it leads to slight losses.

Zhou Miao, a property agent at the Jinan branch of Powerchina Real Estate Group, said: “Government policy does not support buying a home. “Many people have postponed plans to buy their home until next year in the hope that the authorities will relax credit control.”

The Jinan problem, home to millions of people, is part of a nationwide cold snap across China’s real estate sector, which has tainted the country’s economic growth for decades but is now under pressure from Beijing as it seeks to curb debt and bring down prices. Control

The crisis in Evergrande, one of the world’s most indebted developers and a symbol of leverage, has helped fuel China’s urbanization, highlighting the government’s precarious position as one of the key pillars of the government’s economic model.

After initially reducing rates in the wake of the coronavirus epidemic, the government has sought to avoid the risk of asset bubbles over the past year, especially by taking orrons from real estate developers.

It has added limits on mortgages and rents in big cities. In cities like Jinan, where agents estimate that mortgage approval can take up to two months, authorities have imposed their own restrictions on granting.

Across China’s biggest0 major cities, new home prices rose only 0.2 percent in August compared to July, official data showed last week – their lowest growth rate in eight months. Other data, highlighting the sharp decline in the volume of land purchases and sales, more clearly show that government measures have begun to bite.

For many economists, the recession poses a serious risk to a sector that, according to the Bank of America, accounts for more than 28 percent of China’s gross domestic product and which – through demand for goods, labor and debt – is one of the world’s most important economic indicators.

“I think this time is different,” said Ting Lu, chief economist at Numura, who recently pointed to the “rapid deterioration” of China’s property data and compared it to the efforts of former Federal Reserve Chair Paul Volker in the 1970s to reduce US inflation. .

Evergrand debt crisis highlights importance of assets for China’s economy – Tyrone Siu / Reuters

“If there is a deep recession and there is a financial crisis, of course they are [authorities] It will go back a bit, but we are not there yet. ”

Lu reported a 24 percent drop in new home sales in 30 cities in August and a 53 percent drop in volume in 100 cities. There was a further deterioration in both metrics in early September, he noted.

Falling sales have also hit Evergrand, which, with a liability of about Rmb2tn ($ 309bn), desperately needs cash to meet its obligations to suppliers and creditors. Angry investors descended on Shenzhen headquarters last week to demand their money back because of fears of its failure.

Evergrand’s woes highlight the importance of the property sector in China’s financial system, but it will also have profound consequences for its weakness and the massive economy of hundreds of other developers in China. Property investment has grown per cent by 2020 and has supported an industrial-energy recovery that is higher than in other major economies.

The reverse of that economic contribution was the threat of instability that issued warnings from top regulators. As prices rise in big cities like Shenzhen, the government has unveiled a “red line” that limits property developers’ access to debt, as well as restrictions on bank mortgages earlier this year.

The list of apartments for sale is displayed at a real estate office in Shanghai
Developers are making concessions, even if it leads to losses – Kilai Shane / Bloomberg

China has wanted to speculate on its housing sector for many years. Housing Minister Wang Menghui said in January that China would not use the property to boost the economy, reiterating President Xi Jinping’s 2017 slogan that houses were “for living” rather than assuming. The government recently canceled land auctions in major cities after previous restrictions inadvertently increased prices.

Helen Kiao, head of economic research at Bank of America’s Asia, said policymakers at the time felt more strongly involved in their credit control measures, saying the recession was “mainly due to tight policy.”

Beijing also considers property as an important part of pushing for “common prosperity”. The housing ministry unveiled a three-year inspection of the sector last week, strengthening government pressure to increase control over sectors from education to technology.

While its broader economic recovery from the epidemic is still incomplete and in recent times has revealed a chronic weakness in use due to new infections, China’s economy is under increasing pressure.

Lu noted that the decline in land purchases will likely depend on property investment and demand for construction materials, as well as revenue in local governments that sell land to developers. But others point to a connection between the general prosperity drive and Beijing’s approach to property.

“Beijing has more to consider than the economic point of view,” said Larry Hu, Macquarie’s chief economist in China. “Two to three months of bad data is not being created [it] Loosen [monetary policy]”

Beyond the data, it is still unclear how central and local governments will respond to the long-term weakness of a sector that has created enormous economic activity, employment and wealth. In Jinan, one-third of his apartment was found almost two years after a project was still underway. It is charging Rmb19,100 per square meter, below the break-even price of Rmb20,000.

“Our priority is to improve cash flow,” said a company official, “instead of making a profit.”

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