China plans to collect up to 300 billion yuan (about $44.4 billion) to support real estate developers struggling to finish their projects, while over half a million buyers stopped mortgage payments on their unfinished homes in July.
The fund is collected by China’s State Council, financial information platform REDD reported on July 26. The China Construction Bank has contributed 50 billion yuan (about $7.4 billion) and China’s central bank—the People’s Bank of China (PBOC)—made an effort of 30 billion yuan (about $4.44 billion). The report didn’t indicate which organizations will pay the rest.
However, the fund can’t even fill the loop that the “rotten tail buildings,” or the unfinished presale houses created.
The Chinese regime allows real estate developers to presale apartments even when the buildings are only drawings. Buyers need to pay the whole price, which includes a down payment and mortgage after they sign the contract. The project becomes “rotten tail buildings” when the developer has halted construction for 12 months.
State-run Shanghai E-House Real Estate Research Institute reported on July 18 that there are about 900-billion-yuan (about $133 billion) in mortgages tied to the “rotten tail buildings” in China. Buyers started to refuse to pay mortgages in July.
A residential and commercial complex under construction in Nanning, in southern China's Guangxi region on Nov. 9, 2021. STR/AFP via Getty Images
By July 26, victims from 113 cities in 26 provinces listed 321 unfinished building projects on GitHub. They uploaded photos and statements to verify the authenticity of the claims. E-House calculated that there are 1,701 apartments in one project on average, which means about 550,000 buyers can’t move into the homes they purchased.
E-House warned in its 2022 annual report that buyers of 3.85 percent of China’s real estate projects might refuse to pay the mortgage because the presale homes they bought are “rotten tail buildings,” even though it means they will have a lowered social credit score.
The social credit system is a method the Chinese regime uses to control people. The regime doesn’t allow a low score person to take public transportation or allow their children to go to public schools.
State Fund Won’t Solve the Issue: Banker
On top of the $44.4 billion state fund, local regimes in eastern China’s Jiangxi, central China’s Hunan, southwestern China’s Yunan, northwestern China’s Shaanxi, and southern China’s Fujian provinces also launched local funds to help real estate developers, state-run Jiemian News reported on July 22.
However, economists and bankers don’t think these funds can solve the issue.
“Unless the Chinese regime likes to spend all its money on the real estate market,” Cheng Xiaonong, a political and economics scholar who holds a Ph.D. in sociology from Princeton University, commented on July 24. Cheng didn’t think the regime would spend its national treasure.
“One fund can’t solve the issue,” Zheng Yi, a former China investment banker, told The Epoch Times on July 21. “The rotten tail buildings issue is an accumulated problem. It needs new policies and a large amount of funds to solve.”
Zheng said that developers purchase lands from a local government, sell the apartments to individuals, bribe the government officials and banks to make the projects progress smoothly, put the money into their own pockets, and then pays for the construction.
Residential buildings under construction in Yichang, Hubei Province, on Oct. 20, 2021. STR/AFP via Getty Images
The developers borrow from banks. At the same time, the buyers get mortgages from banks. With the loans and the sales income, the developers should have enough money to finish a project. However, they can’t finish the project if they don’t calculate and control the costs well. On the other hand, the banks that provide loans and mortgages are facing big risks when the project remains unfinished.
To solve the issue, the government has to use taxpayers’ money.
“The government can only support a few developers that it wants to help,” Zheng said. “It doesn’t have the capacity to help all.”
Zheng believes there will be chain reactions. New buyers will only purchase from developers who received the government funds. The other developers will go bankrupt faster, which means they can’t pay back their loans or finish all the projects. Then the banks have nothing to foreclose on and can’t collect the loans and mortgages. The banks face the risk of bankruptcy and can’t issue any more loans to the surviving developers.
“It’s hard to solve the issue,” Zheng said. “I think the worst problem in China’s real estate industry is that the consumers and investors don’t have confidence in the market.”
Market Confidence
China’s property market has lacked buyers since the pandemic began. At the same time, more and more people try to sell their homes. To revitalize the market, the Chinese regime launched policies to either encourage or force people to purchase a home.
Since June, at least nine Chinese cities have been reportedly encouraging residents, including government employees, to “group buy” designated properties in an effort to boost local property sales.
On June 13, the Huangdao district regime in Qingdao city, publicly announced that any resident who had enough savings in the bank should buy a new home, officials must talk to any residents who don’t want to buy, and staff members of each community in the district will be fined if residents in the community buy less than two new homes in June.
An advertisement from Central China Real Estate offering to let buyers use garlic crops to make a down payment on a property in June 2022. Reuters/Screenshot via Reuters
Several city governments, including Zhongshan city, issued a limiting order stipulating “that the interval between each adjustment of the sales price of a new residential building shall not be less than 3 months, and the decline shall not exceed 5 percent.”
The struggling developers are using many ways to promote their products.
In central China’s Henan province, developers offered to take wheat and garlic crops as down payments.
One Central China Real Estate advertisement says buyers can use the crop, priced at 26.7 cents per pound to offset as much as $23,900 of a down payment in one of its developments.
In eastern China’s Jiangsu Province, developers offered to take peaches and watermelons as down payments.
However, these policies and promotions had limited success.
The China National Statistics Bureau released a report on July 15 that said the total home sales decreased 26.2 percent in the first half of the year, compared with 2021, and the total home sales in value decreased 31.8 percent.
That same day, the bureau also released statistics on the home price index of 70 cities in June showing that prices in 34 cities have dropped to a level lower than June 2020. Six of them dropped to the level in June 2017.
A Chinese worker walks past a new property development in Beijing on April 1, 2013. Mark Ralston/AFP via Getty Images
Buyers’ Sadness
The issue of so many unfinished buildings is too big to hide. The regime hasn’t banned related posts on social media. Even the state-run media reported the victim buyers’ sadness.
“I borrowed 500,000 yuan (about $74,000) from my relatives for the down payment, and pay over 6,000 yuan (about $890) for the mortgage every month,” 30-year-old Wuhan resident Li Mingyu (pseudonym) told The Epoch Times on July 13. According to the contract, the developer promised Li it would be ready by the end of 2021 but completely stopped construction last September.
Li said her salary isn’t large, and she felt her life would be totally ruined if she kept on paying the mortgage for an unfinished home.
Yang Yue (pseudonym) and her husband migrated to Zhengzhou several years ago to operate a furniture business. They don’t have local registered addresses which the regime uses to control where people move. To send her son to a school in the city, they have to own a home.
“We bought the presale apartment in 2020. The developer would give us the keys in 2023,” Yang told The Epoch Times on July 23.
Yang and her fellow home buyers found that the developer stopped construction of the building last year, and didn’t give them any information about when they will resume the project. At the same time, it becomes harder and harder to sell furniture. “People became poorer, and the economy is in bad shape.”
Facing the bills for her store’s rent, current home rent, living costs, and education for her son, Yang said she regretted buying the presale home.
An elderly Chinese farmer stands outside her home on farmland backdropped by a new housing development in Hebei on Nov. 21, 2014. Kevin Frayer/Getty Images
State-run Huashang Newspaper reported in March that over 300 buyers in Xi’an didn’t have enough money to rent a finished home, and moved into the unfinished presale apartments they bought in 2013 or 2014. The unfinished residential buildings have no electricity, water, heating, or bathroom. And the walls and floors are just raw cement.
Yi Rucontributed to this report.
Nicole Hao
Author
Nicole Hao is a Washington-based reporter focused on China-related topics. Before joining the Epoch Media Group in July 2009, she worked as a global product manager for a railway business in Paris, France.
