The Chinese government has urged banks and financial institutions to support a struggling real estate sector where major developers are overwhelmed by enormous debt and lack the capital to complete homes that have been pre-sold to hundreds of thousands of homebuyers.
This move reflects Beijing’s challenging position of having to manage local government debt risks while injecting capital into the real economy to boost growth. The property sector is particularly critical not only because it is a major driver of growth, but also because housing issues are closely linked to social stability.
Authorities have instructed financial institutions to support “reasonable” fundraising requirements for developers that are “operating normally,” according to an official report from the Xinhua news agency Friday.
The report also mentioned that capital raised through credit, bonds, and stock issuance has been effective in stabilizing the real estate market, citing a meeting organized by various regulatory agencies and financial institutions.
There is no official estimate of the extent of debt accumulated by property developers.
China Evergrande is the world’s most indebted developer with over US$300 billion in liabilities. It defaulted on its debt two years ago and has yet to devise a repayment plan. Other developers, such as Country Garden and Sunac, are also facing significant challenges.
The crisis is particularly severe in tier-two cities or below, where most of the 841 demonstrations against property developers since January 2022 have occurred, based on data from Freedom House’s China Dissent Monitor. Most of these demonstrations were staged by homebuyers demanding delivery of their properties, with a smaller proportion involving construction workers seeking salary payments.
Implications of property woes
China’s property crisis is not only a growing concern but also a drag on the broader economy and the financial stability of local governments, which heavily rely on land sales for real estate projects to generate revenue. These governments are already under pressure from the cracks in local government fund vehicles that have not generated enough returns to cover their obligations. The massive debts are also fueling concerns of a systemic financial crisis.
The Central Financial Commission, the financial watchdog led by Premier Li Qiang, has emphasized the need to improve financial services that support economic development.
Government debts are expected to account for 83% of China’s gross domestic product in 2023, up from 77% last year, according to data from the International Monetary Fund.
The IMF’s Mission Chief for China, Sonali Jain-Chandra, pointed out that more measures are needed to revive the property market, including ways to accelerate the exit of troubled developers and greater central government funding for housing completion. Analysts at Nomura estimate that about $440 billion will be needed to complete the construction of an estimated 20 million units of unconstructed and delayed pre-sold homes across the country.
In October alone, official data showed that the scale of unsold floor area for residential real estate soared by 19.7% compared with October 2022. Funds raised by developers dropped 13.8% to 10.73 trillion yuan (US$1.48 trillion) in the first 10 months of the year. Domestic loans into real estate dropped 11% while foreign investments plunged 40.3% in the 10 months.
S&P Global has forecast China’s property sales to fall as much as 15% this year, with the drop expected to taper off to 5% for 2024, potentially hindering the post-COVID recovery of the world’s second-largest economy.
Beijing has also announced measures to prop up the economy, including a 1 trillion yuan government bond issuance, allowing local governments to frontload part of their 2024 bond quotas.
Indications for 2024
Investors and businesses are anxiously awaiting indications on Beijing’s macroeconomic direction for 2024 at next month’s annual Central Economic Work Conference. According to Allan von Mehren, China economist for Danske Bank, the government is likely to continue prioritizing supporting private consumption, fighting financial risks, providing fiscal support, and further opening up the economy. Von Mehren also noted the speculation of a 5% growth target for 2024 and the challenges associated with achieving this target.
Last month’s data show China’s recovery to remain uneven, with industrial output and retail sales increasing but inflation and producer prices declining.
Edited by Mike Firn and Taejun Kang.