China grew just 0.4% in the second quarter. And July’s Caixin manufacturing PMI, much weaker than expected (at 50.4, while 50.0 is the watershed between economic growth and contraction, missed market forecasts by 51.5) is not only the result of a widespread lockdown from Covid that is still active, but also of great weakness in the real estate sector.
China, 50 years of work to buy a house
In the background the crisis in the giant Evergrande with its over 300 billion in debt and a sector that has grown on the sale of real estate projects on paper, many of which have stalled due to the groups’ lack of cash. A few years ago, the government initiated a policy of greater equity in the country by preventing overly leveraged companies from receiving new loans from banks. The aim is to give people the opportunity to buy a house at controlled prices. Today in China it takes an average of 50 years of work to buy a property, compared to 15 in London and 10 in New Yorkaccording to a report from the Financial Times.
The Evergrande crisis started here. In late July, the group said its chief executive officer, Xia Haijun, and chief financial officer, Pan Darong, resigned after a preliminary investigation revealed their involvement in the diversion of nearly $2 billion in funds. The funds came in part from payments on mortgages paid by buyers to paper houses. Moreover, by the end of July, Evergrande was supposed to file a debt restructuring plan, but it did not. The stock has been suspended from listing on the Hong Kong Stock Exchange since spring 2022.
Of Evergrande’s more than $300 billion in debt, about $23 billion is tied to bonds issued in dollars and to foreign investors. China has since the beginning of the group’s crisis asked to prioritize the commitments to the single market and to complete the projects for fear of disagreements.
The company has laid for sale days since the Hong Kong officelocated in the tower in Wan Chai, a property that had paid over 12.5 billion local dollars (1.6 billion US dollars) in 2015, but it appears that today the building is worth about 9 billion HK dollars.
Chinese banks risk losses of 350 billion dollars
The consequence of this paper house crisis led to a boycott of buyers, who in mid-July began defaulting on mortgages on properties yet to be built in 22 cities, to expand to 90 centers by the end of the month. So much so that Bloomberg has calculated a potential damage to Chinese banks of $350 billion in a worst-case scenario, as confidence in the domestic housing market collapses and authorities struggle to contain the growing turmoil.
Politburo: no rescue fund
A further problem is represented by the project to save the real estate sector. The international media spoke at the end of July about the ongoing construction of a mega-property fund of 148 billion dollars coordinated by the central bank to save a sector that accounts for 28% of GDP.
The Politburo, China’s top political body, in late July gave a negative assessment of the country’s economic growth, but did not announce new stimuli at the end of an important meeting, simply inviting officials to ensure the completion of housing construction projects to avoid further mortgage boycotts.
What can happen now
Data from July of the Chinese real estate sector indicates a clear crisis, sales of the top 100 real estate groups fell 39.7% from a year earlier to 523.1 billion yuan (US$78 billion)according to preliminary data processed by China Real Estate Information Corp.
Evergrande’s bankruptcy would now be the largest ever in China, equivalent to 14.6% of Italian GDP expected in 2022 (source: Tradingeconomics, World Bank), putting in crisis a sector that accounts for a third of growth in the second largest economy in the world. That infection it has already started as the number of buyers who no longer want to pay their mortgages is growing like wildfire. If China stops (and the slowdown is already underway), the recession coming to the Western world will likely worsen. (All rights reserved)