China’s Real Estate Crisis Could Lead to Economic Implosion

Unfinished apartment buildings at the Phoenix City residential project, developed by Country Garden Holdings Co., in Shanghai, China, on Jan. 17, 2022. Qilai Shen/Bloomberg via Getty Images

Commentary

China’s real estate woes and recent regulatory crackdowns on the financial sector indicate the country is facing an economic crisis.

On Aug. 28, China’s top anti-corruption agency, the Central Commission for Discipline Inspection (CCDI), held a meeting during which CCDI Secretary Li Xi called for strict oversight in implementing Beijing’s economic policies and warned against collusion between businesses and government officials.

Before Li delivered his remarks, the CCDI announced that three high-level officials were under investigation but didn’t provide further details. Furthermore, in the banking sector, various top executives were removed from their posts for allegedly engaging in “serious disciplinary offenses.”

Looming Real Estate Collapse

On Aug. 17, Evergrande Group, formerly China’s largest real estate giant, filed for bankruptcy protection in the United States and sought court approval for a $19 billion debt restructuring. Evergrande’s debt is estimated to be as high as $300 billion, making it the world’s most indebted real estate developer.

Evergrande Group resumed trading on Aug. 28 on the Stock Exchange of Hong Kong (HKEX) after a 17-month suspension, plunging more than 80 percent on the opening day of trading. The closing price on Aug. 31 was HK$0.275 (about $0.035), a 99 percent fall from the 2020 high, with a market capitalization of HK$3.63 billion (about $460 million).

On Aug. 7, China’s leading real estate company, Country Garden, failed to pay interest on two U.S. dollar bonds, each $500 million in size, as scheduled. Subsequently, the firm announced the suspension of trading of its domestic bonds.

Country Garden President Mo Bin said in a statement last month that the company “has encountered the biggest difficulties since its establishment.”

Singapore’s Chinese language newspaper Lianhe Zaobao quoted analysts on Aug. 14 as saying that given Country Garden’s size and China’s lack of economic recovery, if the property developer fails to resolve its financial turmoil, it would be more devastating for China’s economy than Evergrande’s collapse.

Chinese economist Ren Zeping posted on social media on Aug. 11 that if Country Garden collapses, it will negatively affect market confidence, economic recovery, homebuyers’ expectations, and more than 60 upstream and downstream industries, affecting the employment of tens of millions of people.

The peak of the real estate collapse may not be quite here yet. According to China-based Jiemian News, 289 real estate companies in China will have debt maturities of about 960 billion yuan ($132.2 billion) in the next year.

Moreover, as China’s property sector deteriorates, foreign investors are selling Chinese stocks at a record pace. The Financial Times reported that offshore traders sold nearly 90 billion yuan ($12.4 billion) worth of Shanghai- and Shenzhen-listed stocks in August.

Local Government’s Financial Crisis

The real estate sector’s weakness would affect provincial governments’ finances. The revenues of local governments rely heavily on land sales as well as real estate-related taxes and bonds.

The hidden debt of local governments has become so massive that even the ruling Chinese Communist Party (CCP) has no control over it. The Financial Times reported on Aug. 11 that China’s top administrative authority, the State Council, is sending a team of auditors and investigators to more than a dozen provinces to examine their accounts and debts from off-balance sheet financing.

As local governments are prohibited from borrowing directly from banks, local government financing vehicles (LGFVs) were created as a financing platform to borrow money and fund infrastructure projects, including highways and bridges. The debt incurred does not appear on official balance sheets, thus becoming “hidden debt.”

On July 12, the U.S. investment bank Goldman Sachs estimated that China’s local government debt, including hidden debt, could be as high as 94 trillion yuan (about $13 trillion).

According to a report from Beijing-based news website Caixin, on Aug. 21, the CCP launched a new round of applications for “special refinancing bonds” in early July to replace some of the hidden local debts. The report said the amount of the special refinancing bonds is about 1.5 trillion yuan (about $206.6 billion). However, the 1.5 trillion yuan of financing is a drop in the bucket compared to the 94 trillion yuan (about $13 trillion) of debt.

The debt crisis of local governments has now affected the livelihoods of a significant portion of the Chinese population. So far this year, a large number of retirees across several provinces protested against so-called health care reforms that negatively affected their medical benefits. In February, a large protest erupted in Wuhan city over health benefit payment cuts, affecting millions of retirees.

The Ministry of Finance said at the beginning of the year that local governments should be responsible for their own debts and finances and implied that bankruptcies could lead to significant social unrest.

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