China’s real estate crisis spoils the Communist Party’s moment of triumph
As China’s Communist Party Congress convenes this weekend to celebrate its achievements over the past five years, economists will be watching how Beijing plans to tackle its most important economic challenge.
A crisis in China’s property sector has been building since Evergrande, one of the country’s biggest property developers and the world’s most indebted, failed to make bond payments last year.
The shock wiped out billions of dollars loaned to the company and its peers, crippling construction and leaving swathes of housing unfinished across the country, and sparking mortgage boycotts from angry buyers.
Chinese policymakers, who have also grappled with the fallout from President Xi Jinping’s strict zero-tolerance approach to the coronavirus, now face weakness in a sector that contributes to more than one quarter of economic output but is riddled with excessive borrowing. In August, house prices fell 1.3% year-on-year, their fastest decline in seven years.
“So far, policy easing has caught up,” said Larry Hu, chief China economist at Macquarie. “It’s still late as the real estate sector is still in big trouble.”
He spoke of a 200 billion Rmb ($28 billion) special lending quota from the central bank to local lenders unveiled in August and the prospect of a further cut in mortgage rates, which were rising before the crisis erupted. . “I think it is likely that after the Communist Party Congress they will do more to support the real estate industry,” Hu added.
Beijing’s response reflected a cautious approach, given the risk of increasing the huge debts of the real estate sector. It has made gradual reductions in the five-year prime lending rate that underpins mortgages, most recently in August, from 4.45 to 4.3%. This month, it relaxed the minimum mortgage rate in some cities and introduced capital gains tax refunds for some home purchases.
Analysts at research bureau CreditSights said the policies, while underscoring “the government’s urgency to stabilize sentiment”, were unlikely to “significantly ameliorate the cash crunch facing private property developers. “.
“We do not expect a visible recovery in the housing sector over the medium term,” analysts noted.
Meanwhile, the CCP congress could reveal high-level plans to address some of the issues driving the housing crisis. Xiangrong Yu, chief economist for China at Citi, said the government’s efforts had “somewhat fallen short this year”. But he suggested that a new economic team, which is expected to be introduced at the meeting, could lead to better coordination between central and local governments.
The latter are heavily dependent on land sales to developers for their income and have a stake in the boost that construction gives to the local economy, but now face a budget crisis of their own as activity will dry up.
In China, houses are usually sold before they are built. The proceeds, placed in escrow accounts, are used immediately to finance construction. The lack of control over this approach, Yu added, was partly responsible for the weakness in the market.
“A widely expected national regulatory framework is still missing because local government interest in local stability may be misaligned with Beijing’s goal for market-wide stability,” he said.
Nancy Qian, an economics professor at Northwestern University, said the pre-sale practice amounts to “essentially borrowing from consumers.”
“Consumers were happy with it because they had a home,” she added. “This [system] works really great until you stop growing.
In addition to anemic growth expectations, policymakers are facing a steep decline in the value of the renminbi, which last month hit its lowest level in more than a decade.
The decline was part of a weakening of the global currency against the dollar in light of aggressive interest rate hikes by the US Federal Reserve to tame inflation. But it could serve to further tie Beijing’s hands in its response to weak housing.
“If U.S. yields continue to climb, then we could be in a situation where that one-sided depreciation expectation materializes again, and in that case they won’t be able to do any easing because that exacerbates [the depreciation]said Carlos Casanova, senior economist for Asia at Swiss bank UBP.
Beyond the currency, decisions announced at Congress or thereafter may be constrained by the government’s cautious approach to debt. Casanova said stimulus efforts had been “gradual at most” due to a desire not to “overstimulate the economy.”
Attempts by real estate developers to deleverage from mid-2020 coincide with the emergence of the real estate crisis and raise fears of the inability of companies to access financing. For now, the question is whether Chinese policymakers will signal that they stick to this principle for the next five years.
Over the past five years, deleveraging has “probably been the biggest thing,” Hu said.
“It is difficult to imagine a significant stimulus without leverage on the economy”.