The quake in China’s real estate market is shaking not only the Chinese economy, which has come to rely on it as a credible engine of growth, but also the world.
Large developers face huge losses, are plagued with large debts, fail to pay their lenders, and languish. The long-running building boom that drove China’s growth is coming to an end, threatening the jobs and savings of millions of families. The Chinese market has plunged and the currency is weakening as Chinese authorities take steps to boost growth.
Here’s what you should know:
What is happening to real estate and the Chinese economy?
For decades, China’s economy has relied on a booming real estate sector fueled by population growth. The housing market has created jobs and acted as a storehouse of wealth for China’s growing middle class. Local governments also depended on income from land sales.
But the country’s population hasn’t grown as much as it used to, and years of tough COVID-19 restrictions are shocking Chinese consumers. The government has also cracked down on the industry’s unsafe practices, leaving property developers with huge debts and more new homes than buyers.
As the government seeks to shift from an economy driven by state-led investment and exports to one driven by domestic consumer spending, housing prices are falling, undermining Chinese household savings and confidence.
how bad
Gavekal Research estimates that China’s private developers have outstanding claims totaling $390 billion, posing a major threat to the economy.
Economists have cut China’s economic growth forecasts, many of them below the government’s target of about 5%.
Both imports and exports have fallen in recent months, with foreign investment falling more than 80% in the second quarter compared to the same period last year. China’s July consumer prices fell for the first time in two years, indicating that Chinese households are spending less.
The Hong Kong-listed Hang Seng Index entered a bear market on Friday, dropping more than 20% from its January highs.
Which companies are at the center of the crisis?
Country Garden, China’s largest property developer, said this month it expected to report losses of up to $7.6 billion in the first half of this year. The company’s stock has plummeted as investors fear the possibility of defaulting on billions of dollars in loans.
China Evergrande, another major property developer, recently filed for bankruptcy in the United States to restructure its debt. The company defaulted on $300 billion in debt in 2021, one of the first big signs that China’s real estate industry is in trouble.
Problems in the sector extend to China’s financial trust companies. The company offers investments with higher yields than ordinary bank deposits and invests heavily in real estate projects.
Chuei International Trust, which manages about $85 billion in assets, recently failed to pay investors. Videos circulating on social media showed investors protesting in front of the company’s offices in Beijing, demanding the company pay back.
What is the Chinese government doing about all this?
Chinese regulators began cracking down on reckless borrowing in 2020, requiring companies to reduce their debt levels before taking on more debt.
This led to trouble for heavily indebted developers like Evergrande and Country Garden. More than 50 Chinese property developers have defaulted on payments over the past three years, according to Standard & Poor’s.
The government recently outlined a program aimed at boosting spending and investment, but details are unclear.
The People’s Bank of China on Monday cut the one-year lending rate used for most business loans, but kept the five-year rate used to set mortgage prices unchanged. Economists expected a more aggressive move.
What impact could China’s problems have on the global economy?
Over the past decade, China has supported more than 40% of global economic growth, compared with 22% in the United States and 9% in the euro area, according to BCA Research.
China’s slowdown in consumer spending has hit companies with operations in the country, including U.S. tech companies and European luxury groups. A weaker Chinese economy also means less demand for oil, minerals and other industrial components. China is one of the United States’ largest trading partners, buying billions of dollars of American crops and machinery each year.
That said, the reaction from global investors has been relatively muted so far. The S&P 500 index has fallen for three consecutive weeks in recent weeks amid signs of trouble in China’s economy, but is still up year-to-date, driven by big tech companies. Investors in the United States and Europe are also watching the next moves by central banks on interest rates as countries face stubborn inflation.
Report contributors: Keith Bradshire, Peter S. Goodman, Alexandra Stevenson and Daisuke Wakabayashi.