Beijing seems clueless about how its policies have almost single-handedly caused China’s present property crisis. It is not even clear that Beijing yet understands the gravity of the situation and the danger it presents to the financial system and the economy. Beijing may muddle through these challenges, but the fallout will nonetheless weight on the economy for a long time to come.
Todays’ crisis is almost entirely a product of Beijing’s central planning apparatus. It began in the late twentieth century. Then, most Chinese lived in housing provided by their Communist Party work units. When economic liberalization gather momentum in the 1980s and 1990s, housing boomed. Beijing’s planners could see the obvious and encouraged the movement, streamlining regulations for residential real estate development and providing easy financing through state-owned banks to both developers and individual home buyers. Local governments, looking forward to the added revenues from land transfer and sales fees, added to the encouragement with still more liberal financial arrangements.
Problems began because as China caught up with its housing needs, the authorities nonetheless continued the hype. Beijing turned a blind eye to the change in circumstances because residential real estate development enhanced overall growth figures. Local governments continued their assistance because property sales and transfers were generating huge revenue flows of according to the Peterson Institute for International Economicsas much as 25 percent of all revenues in some locales. Developers naturally responded to the continued government support, becoming increasingly leveraged in the process and pursuing more and more dubious projects. Individual homebuyers also responded to the continued financial support, extending themselves more than they otherwise might. According to the Congressional Research Service, residential real estate development rose to an astronomical 30 percent of China’s entire gross domestic product.
Matters presented a disaster in waiting. President Xi Jinping brought it on, no doubt inadvertently, in 2020. In the middle of a pandemic that was already crippling China’s economy, Xi decided that real estate development was draining credit from his preferred areas of endeavor, mostly high-end technology. Even before ramping up his preferred area, he decided to rein in the property development sector by launching a policy called “three red lines.” It imposed strict debt and cash flow requirements on developers and effectively cut off the once generous flow of credit to which they had become accustomed. Extended as the developers had become, they began to fail, beginning with the giant of the sector, Evergrande.
These failures have generated tremendous financial and economic fallout, as would the failure of anything that had constituted some 30 percent of the economy and had sucked down huge amounts of capital. At first Beijing seemed not to recognize the danger and did little. As much as this official ineptitude risked financial collapse, Beijing got lucky. The viability of the banks was challenged as developers failed to repay their huge debts and individual homebuyers refused to pay on mortgages that they had taken to prepay for units on which Evergrande and other developers could no longer deliver. Banks and other lenders could have had trouble paying on their own financial obligations, and failure could have cascaded through the system as it did in the United States during the financial crisis of 2008. But even as developer loans fell from some 30 percent of all bank loans in 2019 to a mere 23 percent in 2023, large loan loss reserves of some 89 percent of all questionable loans enabled the banks to manage the loss.
Lucking out on the initial shock of this financial trouble still leaves Beijing facing a huge weight on the economy. A nation does not lose a huge sector of its economy without suffering an equally huge setback in its growth momentum. And indeed today, some three years after the troubles began, the property sector continues to shrink. According to Beijing’s National Bureau of Statistics, investment in property, after declines in late 2020, 2021, and 2022, has fallen an additional 8.8 percent this year through August. Home sales by value among China’s top 100 developers were in September almost 30 percent below year ago levels. Local governments have lost so much revenue from property sales and transfers that they are facing difficulties providing their people basic government services. Meanwhile, Chinese property prices, according to data compiled by the Federal Reserve Bank of Saint Louis, have fallen almost 8 percent over the last two years. Because Chinese households have, according to the Council on Foreign Relations, almost 50 percent of their net worth tied up in real estate, the drop in prices has made many feel considerably poorer and accordingly stifled consumer spending, adding yet another impediment to China’s growth prospects..
Though Beijing has of late become more aggressive in supporting both financial institutions and property developers, for instance rescinding some of the strictures of the three-red-lines policy, the support remains small next to the need. Even if Beijing were willing to step up its game now, the damage is done – first from Beijing’s mistake of extending the support beyond the economy’s needs, then from abruptly removing it in 2020, and then not responding promptly when the fallout first broke on the scene.
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