Beijing Finally Wakes Up

At last China’s authorities have taken steps to reliquefy property developers

An aerial view of the Evergrande Changqing community in Wuhan, Hubei Province, China, on Sept. 26, 2021. Getty Images

Commentary

After more than a year of delay, equivocation, and finger-pointing, Beijing seems to have awakened to its economy’s needs. The authorities have moved to enhance the liquidity of real estate developers. As this column has pointed out for months, this is something the authorities should have done more than a year ago when Evergrande first announced that it could not meet its obligations.

Long overdue, this latest effort by Beijing may be too little too late. Unlike action a year or so ago, action today must deal not only with the problems of developers, but also the damage to wealth and confidence that has emerged in the interim, as well as the ill effects of China’s draconian COVID-19 lockdowns.

Earlier this month, Beijing announced 16 separate measures to support property developers. The general aim is to halt or at least slow the collapse of this critical sector of China’s economy, which, due to past enthusiastic and misplaced emphasis of Beijing’s central planners, had grown to an outlandish 30 percent or so of the economy.

Had Beijing made these or similar moves in August 2021, when Evergrande first indicated that it was cash short, they would have had a better chance of success than they do now. A special flow of liquidity then would have allowed Evergrande to complete the housing units for which it had contracted and for which it had taken buyers’ money. Such a flow of liquidity would have staved off the failures of other developers that, in the past year, have greatly compounded problems in the real estate and banking sectors. The failure to act for more than a year has allowed problems to fester, destroyed confidence, and deepened the sector’s and the economy’s problem, so now policy must fight an uphill battle.

Official data makes painfully clear the damage done to this growing and important sector during the time since Beijing’s initial failure to act. China’s National Bureau of Statistics reports that investment in real estate development, after growing 7.3 percent in 2021, mostly earlier in the year before Evergrande announced it was cash short, has fallen 8.8 percent so far this year. Sales of commercial floor space had declined 22.3 percent after a growth of 7.3 percent in 2021, and revenues from the sale of commercial space have fallen 26.1 percent so far this year after a growth of 11.8 percent in 2021. Home prices have dropped at the fastest rate in years, and residential property sales have declined for 15 straight months.

A commercial housing community is seen under construction in Nanjing, Jiangsu Province, China, on April 15, 2022. Since March, banks in more than 100 cities across the country have voluntarily lowered mortgage interest rates due to weakening market demand. Costfoto/Future Publishing via Getty Images

Today’s problems have less to do with developers than buyers. Real estate firms are delighted to find new resources to meet their obligations and relieve at least some of the burden of their bankruptcies. Now, because of past inaction, the real estate market and China’s economy face a loss of confidence that, at the very least, has prompted buyers to shrink back from making a commitment to new home ownership.

The root of the problem lies in the losses sustained by people in unfinished housing units. In China, unlike in the United States, people can pre-buy homes from developers like Evergrande. They can procure a mortgage on these pre-bought but unbuilt dwellings. When Evergrande and, after it, other developers failed, they also failed to finish these pre-bought units, leaving thousands of Chinese with mortgages on properties they could not occupy.

When it became apparent that Beijing was doing nothing, many of these people—desperate—refused to pay on their mortgages, an act that carried the developers’ problems into banks and other lenders. Thousands more saw what was happening and, not surprisingly, decided to avoid such risks. A drop in home prices has reinforced the growing conviction that ownership is too risky. Now even though the new flow of liquidity will enable the developers to complete at least some of those unfinished units, buyers, once plentiful, are no longer so willing.

China’s COVID problems, though unrelated to the real estate mess, have nonetheless compounded these problems. The severe lockdowns and quarantines imposed by Beijing’s “zero-COVID” policy have fostered widespread concerns among the Chinese about future income growth, either because they fear more lockdowns or because they are unsure about the economy’s prospects generally even after China emerges from COVID-linked oppressions.

Such anxieties have been exacerbated by the remarkable slowdown in China’s growth. Whatever the specific cause of concerns (and it is likely a combination of these), they have depressed the kind of optimism that is a necessary part of anyone’s decision to buy a new house. Some who were thinking of trading up from their existing property have rethought that decision. Others who have saved what could serve as a down payment have developed a greater reluctance to put those funds at risk.

If the additional liquidity provided by Beijing’s 16 measures can overcome the reluctance of homebuyers and if Beijing can also temper the severity of its “zero-COVID” policy, there is a chance that matters can begin to recover. But for the time being, these are big “ifs,” especially big because Beijing waited so long to act.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.