Expert Does Not Believe Policy Will Solve China’s Real Estate Bubble

Unfinished apartment buildings in a residential complex developed by Jiadengbao Real Estate in Guilin, China, on Sept. 17, 2022. Eduardo Baptista/Reuters

After Xi Jinping said “Housing is for living in and not for speculation,” and China will “build a housing system featuring multiple suppliers and various channels of support that encourages both housing rentals and purchases” at the party’s 20th national meeting, the party media reported that “policy has set the tone” for Chinese property development in the next five years.

While policy could affect the direction of the market, the market itself is the key for development, a financial expert told The Epoch Times.

Real Estate Crisis

When China delayed releasing the third-quarter gross domestic product (GDP) for a week amidst the 20th national meeting, media reported that property developers in China were anxious for clues from the leadership that would resolve the market crisis.

The latest Chinese data in property investment showed a year-on-year decrease of 8 percent from January to September of 2022.

The Chinese analysts believe the “policy” gives direction to the developers and the market, and the government strategy will assist a sustainable development of the market by “supporting rentals and purchases” as its fundamental “path,” according to party mouthpiece, China News Service (CNS).

However, past experience has proved that it is CCP policies that have often caused market speculation and declined investment, said Paul W. Chiou, a finance expert at Northeastern University, Boston in a recent interview with the Chinese language edition of The Epoch Times.

Chiou explained that governmental subsidies might provide developers some relief for a few months, but won’t be enough to cover the crisis caused by the slow sales and the lack of cash flow.

Crisis Building for 20 Years

Chinese housing reform in 1998 initiated a new phase of commodification of real estate. “The housing prices increased by four to five times between 1998 and 2019,” Chiou said.

Housing prices in the prime lots of first-tier cities such as Shanghai and Beijing are even higher than those in New York and Los Angeles, he said, but “China’s per capita GDP is around one-fifth that of the United States. The backbone to support high housing prices does not exist.”

Under the circumstances of lacking investment channels, China’s large foreign exchange reserve at that time, was part of the reasons local governments chose property development to boost the economy. “But two decades of overdevelopment, coupled with the misconception that housing prices will only go up and not down, have formed such a serious bubble today,” Chiou explained.

A worker in front of a sign showing Evergrande Group's China operation at one of the company's housing complexes in Beijing on Dec. 8, 2021. Noel Celis/AFP via Getty Images

Three Factors

Chiou says there are three factors affecting Chinese real estate development.

First, the asset quality and funds.

Data shows that the delinquency rate on all loans, for all commercial banks, was 1.73 percent by the end of 2021, higher than that of the United States at 1.31 percent.

Chiou explained the reasons for the bad debts include the wide spread of unfinished buildings and mortgage boycotts in China; the hidden burden to the Chinese banks from the annual loss of more than $10 billion and more than $1 trillion debt from the Chinese national high-speed railway; the unpaid foreign loans or aid associated with the Belt and Road Initiative, and the global economic decline.

He said that the asset quality of China’s financial sector has dropped to a worrying level, and funds are obviously lacking.

Second, people’s unwillingness to invest in real estate.

For two years, Chinese real estate investment demonstrated huge negative growth almost every month, and indicated a low willingness to invest.

Third, China’s foreign relations.

Chiou said that China’s deteriorating international relations with the United States and Australia, for example, will eventually become a trade issue. Declining foreign trade and export will affect China’s economic development and consumption power.

Chiou said that for a policy to be effective it needs time to evolve. Judging from the aforementioned phenomenon, he expresses reservations about the Chinese real estate market.

After all, he said, “Market is determined by supply and demand.”

Lin Cenxin contributed to this report.