China’s Mortgage Revolt

Xi has driven China into an economic crisis—now, the Chinese are fighting back

Unfinished apartment buildings at China Evergrande Group's Health Valley development on the outskirts of Nanjing, China, on Oct. 22, 2021. Qilai Shen/Bloomberg via Getty Images

Commentary

Something rare is happening in China. Protests and boycotts are expanding.

Not for democracy, exactly, as in 1989 in Tiananmen Square and up to 2020 in Hong Kong. The protests today—from Beijing to Guangxi and recently in Hong Kong—are outwardly against property developers who absconded with down payments, never to deliver the promised apartments. These homes now exist as vacant windows—seen but inaccessible to the families who bought them—in lifeless gray hulks that lack the living pulse of electricity, water, elevators, and neighbors.

Yet, those who lost their down payments in ghost apartments that string together into ghost cities are required to pay their monthly ghost mortgages. The response is a revolt with “mortgage boycotts” spreading throughout China.

The dissent has a deeper political resonance because it directly results from Xi Jinping’s failed economic policies, and Xi today seeks an unprecedented third term as general secretary of the Chinese Communist Party (CCP).

In 2020, Xi’s regime issued “three red lines“ against the ballooning debts of property developers, which limited access to capital for the most indebted, resulting in a wave of bond defaults. Developers had no money to continue construction on buildings for which buyers were already paying.

Potential new homebuyers have taken notice and are wisely waiting to buy new unbuilt homes that may never get finished. Demand is also lower for new homes because of a slowing economy from COVID-19 lockdowns. In a highly leveraged industry, all of that constrains developer revenue and risks further defaults.

Without a government bailout, the sector will likely suffer for years—or collapse.

Unfinished apartment buildings at the Phoenix City residential project, developed by Country Garden Holdings Co., in Shanghai on Jan. 17, 2022. The crisis engulfing China's property sector has the developer's shares and bonds hammered amid fears that a reportedly failed fundraising effort may be a harbinger of waning confidence. Qilai Shen/Bloomberg via Getty Images

Investors already expect $130 billion worth of losses on $200 billion worth of dollar-denominated bonds in China’s property sector. Of 500 outstanding bonds issued by China’s developers, two-thirds are in the distressed-debt territory, due to trading at less than 70 cents on the dollar. Some bonds for hundreds of millions of dollars, including those of the near-bankrupt China Evergrande mega-developer, are trading at just 9 or 10 percent of their face value, implying a high probability of default.

Incremental measures by Beijing, such as the cut to mortgage rates to 4.3 percent from 4.45 percent on Aug. 22, and the prior week’s decrease in the medium-term lending rate for one-year loans to 2.75 percent from 2.85 percent, will have little effect and risk increasing inflation.

Moody’s Investor Service expects defaults in the sector to continue throughout 2022 because a strengthening dollar is making it harder for China’s developers to pay their dollar-denominated loans.

This has broad implications for more sectors, as approximately 30 percent of China’s economy is in the property sector and in debt to the financial sector. That means the entire economy is spinning toward crisis.

Added to China’s economic stressors are an equity valuation bubble and a severe drought that, in some places, is the worst since 1865, when data were first collected. The drought has slowed or closed factories such as Tesla and Toyota.

Xi is increasing China’s greenhouse gas emissions until 2030 in an attempt to compete economically with the United States and Europe, which could make droughts and other environmental impacts more likely.

Other indicators of increasing economic stress in China are laws in the United States that require the delisting of Chinese companies for failure to comply with auditing rules, as well as warnings from institutional investors that China is near-uninvestable. Investor confidence is decreasing, in part, because of Beijing’s territorial expansionism in places such as Taiwan.

On Aug. 25, the founder of Huawei, China’s largest company, warned his employees about years of hard times ahead. Consumer and factory activity is down in China, and youth unemployment is at a record high of 19.9 percent.

The effects of Xi’s failed economic policies are interrelated and multiplicative, and decrease the government revenues necessary for a property sector bailout.

As regular citizens suffer the consequences, dissent and mortgage boycotts could increase to rent and tax boycotts. About 200 million people rent homes in China.

Expanding protests demonstrate Xi’s mistakes in biting off more than he can chew, not only economically, but in the pandemic response and by running an aggressive military and foreign policy.

While the protests are nominally against property developers, their broader portent is against Xi himself, as well as the CCP. If protests expand further, they could bring down the regime in Beijing—which is why its survival depends upon restarting stalled development projects and scrubbing the internet of calls for more protests.

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