Despite Beijing’s recent attempts to stem declines in China’s property market, it continues to sink—and by just about every measure available.
For regular readers of this column, the news should come as no surprise. From the first signs of trouble as far back as 2021, these analyses have documented the regime’s failure to take sufficient steps as quickly as was needed to arrest the economic damage brought on by failures among property developers and homebuyers. The pattern appears to be continuing in real-time.
The latest news couldn’t make matters clearer. The value of property sales in China fell by 17 percent in December 2023 from the year before, worse than November’s 9 percent shortfall. The volume of property sales fell by some 13 percent from the year before Chinese banks reported weak mortgage demand, and new floor space constructed in December was 21 percent below where it was a year before. Home prices generally also are falling—by 1.1 percent in just December. These declines have placed a great weight on the country’s overall economic prospects.
Beijing, of course, blames the failing property developers for this ugly situation. Indeed, the managers of these firms deserve some. In the days when the authorities were enthusiastically supporting residential property development, the companies—Evergrande and Country Garden prominent among them—borrowed aggressively, advanced dubious projects, and otherwise spent altogether too freely. Despite such mismanagement, most of the blame for this sorry situation lies with the Chinese Communist Party (CCP), which has failed to manage things in at least four ways.
Beijing’s first mistake was to push residential real estate development too actively for too long. To be sure, late in the previous century and early years of this century, China desperately needed housing. At the time, it was a good policy to promote development through local government support, for instance, as well as easy credit terms for both developers and homebuyers.
But as the country’s housing stock caught up with needs, the authorities continued this active support. No doubt it was tempting to do so. Property development enhanced growth statistics and made the CCP look good. But as development reached some 30 percent of the economy, it should have been clear that matters had become untenable. Developers were reaching into more dubious projects on still easy credit terms.
The second error occurred around 2020, when Beijing finally woke up to the unsustainable nature of the property sector. The recognition was no mistake, but the draconian reaction to it was. Instead of allowing developers and homebuyers time to adjust by gradually removing former levels of support, the CCP suddenly changed its priorities. Highly leveraged developers began to fail almost immediately, with Evergrande, the most flamboyant of the lot, first on the list in the middle of 2021.
As it became apparent that these problems were widespread, the CCP made its third mistake: It failed to protect its financial system from the growing weight of questionable debt brought on by the failures. Not only were there questions about Evergrande and other developers, but homebuyers—who had taken out mortgages to pre-pay for apartments that developers could no longer finish—refused to make mortgage payments. These matters could not help but slow the flow of credit and, accordingly, the pace of economic activity. Because of the uncertainty in the area and the sudden loss of credit, real estate values fell, severely hurting Chinese household wealth and stemming growth in another way by stifling consumer spending.
Had Beijing acted quickly to, for instance, inject funds into financial markets or guarantee support to finish the pre-purchased apartments, it could have minimized this fallout. Still, Beijing dithered, allowing these problems to build on themselves.
When, at last, the authorities recognized the need to act, their efforts were inadequate to deal with a problem that their inaction had allowed to metastasize for months. Beijing first encouraged the banks to lend to developers so they could complete the pre-purchased apartments and presumably restart mortgage payments by the owners. The banks have shown reluctance, not the least because Beijing has failed to back them.
The CCP has also begun a 350 billion yuan (about $48.8 billion) program to build affordable housing, a small gesture in a sector that once constituted almost a third of the economy. Beijing has also eased rules on how much people must put down to buy a residence in Beijing and Shanghai. Moves such as these might have arrested the problem when it first became evident almost three years ago, but pressures have become more severe in the interim, so as the December figures show, these efforts are now inadequate.
Against this history, three things are clear. First, Beijing will need to take bolder steps to remedy this situation, and the sooner, the better. Second, even if the authorities act boldly and quickly, it will take time to arrest the declines in the property sector and longer still to turn the general economy around. Third, China’s economic prospects will suffer until the property sector stabilizes and probably for some time afterward.
