The Real Estate Crisis of the Dragon
With nearly one-third of China’s economic activities being driven by the real estate sector and the collapse of one of the giants in the real estate sector, the Evergrande Group, the situation in China looks grim and has been grabbing a lot of attention from countries the world over. Availability of cheap credit for the real estate projects, keeping bank deposits at near zero-level and reckless expansion spree followed by heavy borrowings by the developers led to what we now know as the real estate crisis of China, which has become quite noticeable to the world since 2020. The blog aims to provide the readers an insight into what exactly has been brewing in the Chinese economy due to the crisis and how it appears to be alarming for not just China but for the economies of the countries all over the world.
Even though China has been experiencing the crisis in 2022; it did not occur in a night. Its roots lie in 1990s when China was experiencing continuous rise in urban population. The rise in urban population indicates increase in demand for various services such as transport, water supply, electricity and most significant and relevant one is that for housing facility. This brought about prosperity in real estate sector which was experiencing slow growth till 1st half of 1990s.
Currently, along with the real estate crisis, matters have been exacerbated by Beijing’s ruthless zero-covid strategy, which has led to repeated long lockdowns, hurting economic growth and people’s incomes, and therefore their savings. Youth unemployment, according to official figures, has reached 20%. This affects a range of businesses across industries, including companies like Apple, Tesla, Intel, and Toyota.
The banking sector is also affected by the real estate crisis. As 30% of Chinese bank lending goes to housing construction, and at least 60 percent of bank loans are backed by property as collateral that means if property developers functioning in property markets defaults then China will experience a full-blown financial crisis, which could undermine regime stability and have serious consequences for the global economy.
The central bank has injected some fresh money into the Chinese banking system to fight the real estate crisis, but strangely enough put much of the onus on local governments. They have been asked to offer tax rebates and cash subsidies to home buyers and relief funds to developers. But local governments are not in very good shape financially, and a key reason for this, ironically, is the bursting of the country’s real estate bubble. One of their largest sources of income used to be revenue from selling usage rights over state-owned land to developers.
Debt-ridden developers with millions of unsold apartments and hundreds of unfinished projects will hardly be buying more land any time soon. Local governments’ land income dropped 31% year-on-year in the first half of 2022. Extending new concessions to both citizens and developers could have dire consequences for their balance sheets. Beijing has not announced any long-term solutions to these problems.
A collapsing property market in China has triggered alarm bells across the world. It is still the manufacturing hub of the world and if its economy falters, countries around the globe would suffer from slower and more expensive exports.
Contract electronics and semiconductor manufacturing, where China is a global leader, had already stalled various sectors such as auto, consumer electronics and more due to Covid-induced supply bottleneck
China is also the global creditor of the developing world. Developing countries dependent on China for infrastructure projects, would be hard-hit.
The Xi-government has sponsored numerous projects under the Belt and Road Initiative. Currently, B&RI projects are valued at over $1 trillion across 139 countries around the globe. These building sites, highways, power generation plants and so on could be left unfinished.
It is a wise choice to have a look at the lessons that India needs to learn from this crisis:
- Investment decisions that lack economic sense may put people's life in trouble. In India's case, people mindlessly put their money into fixed deposits without considering inflation.
- Thoughtful lending by banks and strict adherence to the banking regulations and norms pave the way to reduce bad loans and help in easy recovery of debt. Similarly, major chunk of investment in the form of physical gold also hampers the GDP growth of India to some extent.
After the above analysis of the real estate trouble in China, we can say that the Chinese economy in particular and the world economies in general will be affected by the crisis. The interdependence of economies of the world on each other is one of the responsible factors for the worldwide effect of the crisis. At the end, it is a big lesson for each and every economy of the world irrespective of developed or undeveloped, to learn from the mistakes committed by an economy of country , in this case Chinese economy and must not repeat it for the sake of its citizens and ultimately for the world economies.
Written by: Prathamesh Mokashi;
Aparna Sreenivasan
References:
- https://youtu.be/FxiZRYJTEo0
- https://m.economictimes.com/news/international/business/explained-why-chinas-crumbling-real-estate-sector-has-the-world-on-edge/articleshow/93071962.cmsutm_source=whatsapp_pwa&utm_medium=social&utm_campaign=socialsharebuttons
- https://www.nytimes.com/2022/08/17/business/china-economy-real-estate-crisis.html
- https://www.thehindu.com/business/explained-chinese-real-estate-firm-evergrande-crisis-a-lehman-moment/article36643709.ece
- https://interestingengineering.com/culture/chinas-ghost-cities-and-its-65-million-empty-homes
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