{"id":10875,"date":"2022-09-01T07:30:35","date_gmt":"2022-09-01T07:30:35","guid":{"rendered":"https:\/\/focus.cbbc.org\/?p=10875"},"modified":"2025-04-23T09:37:24","modified_gmt":"2025-04-23T09:37:24","slug":"what-is-happening-in-chinas-real-estate-sector","status":"publish","type":"post","link":"https:\/\/focus.cbbc.org\/what-is-happening-in-chinas-real-estate-sector\/","title":{"rendered":"China’s real estate crisis explained"},"content":{"rendered":"

What is happening in China\u2019s real estate sector? It used to be a key driver of the economy, but the tide has turned and now it\u2019s starting to drag. Failure to regulate the sector in boom has left the country with limited options in bust, and as a result, UK companies are beginning to be impacted because Chinese partners are defaulting on their payments due to cash flow issues, writes Joe Cash<\/strong><\/span><\/h2>\n

China\u2019s property market accounts for around 25% of GDP. Analysts widely assumed that this, therefore, makes the sector too big to fail. They might be about to be proven wrong. The property market has contracted by as much as 7% year on year, causing real estate to have become a significant drag on the Chinese economy. Following the struggles of Evergrande, China\u2019s second-largest property developer, late last year, more real estate companies have come to be swallowed by their ballooning debt. The co-chairwoman of Country Garden, another massive developer, has lost as much as \u00a310 billion from her personal fortune in the last 12 months. The result is that developers are no longer building homes, buyers have started to hold off on paying their mortgages or entering the market, and the system has run out of capital.\u00a0<\/span><\/span><\/p>\n

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Background\u00a0<\/span><\/span><\/h4>\n

China\u2019s real estate sector might be seen as a bit of a Ponzi scheme. The developers rake in hordes of cash from existing customers for properties that have not yet been built and then use that cash to fund the construction of homes for new customers, which is fine, assuming that confidence is high and all the cogs are turning. Should investors in the developer companies lose faith in their debt management<\/a>, however, or the economic environment takes a turn for the worse, the model then starts to come under considerable strain. Real estate is also incredibly pro-cyclical: everything good feeds on itself in the boom, and everything bad feeds on itself in the downtime.\u00a0<\/span><\/span><\/p>\n

Worse, there is little incentive to regulate the real estate sector in good times. High sales come with high demand and high borrowing, meaning that Chinese consumers, the banks, the developers, and, to a certain extent, the government, are all happy. Indeed, the only incentive to regulate during a boom is to reduce the damage a likely bust will bring. The Chinese government sought to introduce closer regulation last year when it implemented a \u201cthree red lines\u201d policy to restore the real estate sector, but it has not been particularly effective \u2014 at least not yet.<\/span><\/p>\n

More than 90% of properties sold in China in 2020 were off-plan, but the completion rate was just 60%. Predominantly middle-class mortgage holders are starting to complain. Furthermore, the real estate market is not struggling due to financial pressure on homeowners \u2014 it is the developers who are under the cosh. That is an awkward state of affairs for the Chinese government in a politically sensitive year in which President Xi<\/a> will likely secure a third, unprecedented term. Middle-class mortgage holders could start to wonder whether the government, the regulators, and the state-owned banks that drive much of the country\u2019s real estate activity, can actually deliver the better life they have promised.\u00a0<\/span><\/span><\/p>\n