China’s Real Estate Collapse Threatens Regime’s Financial Stability: Expert Warns

A worker installs sign outside a branch of the Industrial and Commercial Bank of China (ICBC) in Beijing, China, on May 5, 2015. Greg Baker/AFP/Getty Images

Two years into China’s real estate crisis, a larger-scale financial crisis is looming in the communist state. China’s vice premier, He Lifeng, recently warned that the country must prevent systemic financial sector risks.

U.S.-based Chinese economist Li Hengqing told The Epoch Times that the Chinese Communist Party’s (CCP) leadership is anxious since the severity of the economic situation has far surpassed the so-called systemic financial risks.

“It is now a financial collapse,“ he said. ”The collapse of the financial system closely linked to the bursting of the real estate bubble is imminent.”

Systemic Risks

On May 21, the CCP held a national conference with the country’s local financial regulators. Premier Li Qiang, chairman of the CCP’s Central Financial Committee, emphasized that the country needs to “firmly maintain the bottom line of preventing systemic financial risks.”

Mr. He warned of the need to strictly guard against the three major risks: real estate crisis risks, local government debt risks, and risks from local small and medium-sized financial institutions.

According to the latest report from the China Index Academy, from January to April, the total sales of newly built commercial properties amounted to 290 million square meters, representing a year-on-year decrease of 20.2 percent. The total sales value was 2.8 trillion yuan (US$386.6 billion), a year-on-year decrease of 28.3 percent. In April alone, the sales volume was 671.2 billion yuan (US$92.7 billion), a year-on-year decrease of 30.4 percent.

The data from China’s National Bureau of Statistics shows that in April, the decline in the sales prices of commercial residential properties across various cities continued to increase both year-on-year and month-on-month. Among the 70 large and medium-sized cities, only six, including Shanghai, saw month-on-month increases in new house prices, five fewer than in March. The number of cities with month-on-month decreases rose by seven to 64.

Impacts on the CCP’s Fiscal Revenue

The CCP’s official data shows that from January to April, China’s tax revenue was 6.6938 trillion yuan (US$916.9 billion), a year-on-year decrease of 4.9 percent. In the budget revenue of government funds, income from the transfer of state-owned land use rights related to real estate was 1.0536 trillion yuan (US$145.9 billion), a year-on-year decrease of 10.4 percent.

Mr. Li said that in recent years, China’s “local governments have invested large amounts of financing into real estate” through financing platforms. “In the real estate crisis, huge debts are left behind, with estimations of around 60 trillion yuan (US$8.3 trillion), 90 trillion yuan (US$12.5 trillion), or even close to 100 trillion yuan (US$14 trillion). Local governments cannot repay such large-scale debts, and many are now in arrears with salaries, with civil servants facing pay cuts,” Mr. Li explained.

Risks in Small and Medium-Sized Financial Institutions

Regarding the risks to small and medium-sized financial institutions, Mr. Li mentioned the previous Henan rural bank incident in China, which involved the lifelong savings of 400,000 customers, totaling 40 billion yuan (US$5.5 billion), being suddenly inaccessible. The bank customers’ protests were met with brutal suppression by the CCP. There are about 4,000 such small and medium-sized banks in China, and soon these banks will also be impacted.

North American investment adviser Mike Sun told The Epoch Times, “[China’s] banking crisis typically goes from rural banks to local small and medium-sized banks, then to joint-stock banks, and finally to state-owned large banks. To avoid the crisis, state-owned banking giants have started issuing bonds to replenish capital this year, and they recently began issuing ‘Total loss-absorbing capacity’ (TLAC) bonds.”

Recently, several of China’s largest state-owned banks began issuing a special type of loss-absorbing bond for the first time, aimed at preventing a 2008 Lehman-style financial crisis.

Issuance of TLAC Bonds

On May 20, the Industrial and Commercial Bank of China (ICBC) announced the issuance of 40 billion yuan (US$5.5 billion) of TLAC bonds. On May 23, the Bank of China also launched the pricing of 30 billion yuan (US$4.2 billion) TLAC bonds.

The TLAC bonds are meant to address the issue of banks being “too big to fail.” In 2015, the Swiss-based Financial Stability Board (FSB) set TLAC capital requirements for globally systemic important banks (G-SIBs) to prevent these large banks’ bankruptcies from potentially evolving into systemic financial crises.

When the issuing institution encounters a major operational or bankruptcy crisis, the bonds can be written down or converted into equity through contractual or statutory mechanisms. This could result in partial or complete write-downs of customers’ claims, cancellation of interest, conversion of claims into equity, or modification of bond terms such as maturity dates, coupons, interest payment dates, or suspension of interest payments.

“They (the CCP leadership) don’t want to repeat Japan’s real estate bubble burst,” said Mr. Sun. “Short-term crisis response can rely on bond issuance, but in the medium and long term, it still depends on domestic demand. The current measures only delay the crisis and cannot solve the fundamental problem.”

Possible Solutions

In the past 20 years, China’s real estate and its related industries have been a major source of the country’s GDP, accounting for 25-30 percent of China’s GDP after 2010. The World Bank estimates that real estate investment accounts for 13 percent of China’s GDP, and if the supply chain inputs are considered, the real estate industry accounts for about 30 percent of China’s GDP.

Mr. Li said that the CCP has missed multiple opportunities to resolve the real estate bubble. Now, the financial system crisis triggered by the real estate collapse and the super debt crisis of local governments is imminent.

At this point, there may be two possible solutions to this crisis.

“[One possible solution is] clearing debts according to legal procedures, but it will have a huge impact on society, potentially causing social panic. At the same time, the CCP’s regime and its leaders will inevitably be held accountable, and the regime will lose legitimacy,” he said. “[Another solution is to] gradually use government credit to guarantee financial institutions and local governments, but this also means massive money printing to solve debt problems, leading to rapid hyperinflation.”

Mr. Li believes that the failing Chinese economy will inevitably threaten the authoritarian rule of the CCP, potentially leading to its collapse.

Xin Ning contributed to this report.