Trouble is brewing in China’s property market, which is coming off a major debt-fueled building boom.
A liquidity crisis that was headlined last year by the default of China Evergrande (OTCPK:EGRNF) has only gotten worse, with the country’s largest real-estate developer failing to deliver a “preliminary restructuring plan” that it had promised by the end of July. Eroding confidence in the property sector saw sales at the country’s top 100 developers plunge nearly 40% last month, according to data from Chinese real-estate provider CRIC.
What’s happening? Millions of people across China are experiencing trouble in their homes being finished on time, and a growing mortgage payment boycott in more than 90 cities threatens to exacerbate the situation. The debt crisis was already unsustainable before the current crunch, with the average mortgage payment making up over half of a buyer’s monthly income. Looking to revive the sector, China is now working on a nearly $150B bailout fund to complete stalled property projects and head off a backlash by angry homebuyers.
Interestingly, the bailout isn’t aimed at helping highly-indebted developers complete their projects. It is rather targeting local governments (or local government-owned entities) to take over the projects and apply for loans from the PBOC or commercial banks to complete them. Concerns remain over the strategy’s efficiency, given the fact that local governments could also struggle with completing projects, or how older creditors (like suppliers, contractors, bondholders etc.) will be stacked up in the event of new financing.
Outlook: Cities in China are already struggling with severe debt loads as they shoulder much of the expenses related to education, infrastructure and healthcare (such as mass COVID testing programs). The property market slowdown can force more local governments to rein in spending, adding yet another drag to China’s weakened economy, which expanded by just 0.4% in Q2. “The chance of a vicious cycle – declining housing sales and prices, mounting developers’ distress, and deteriorating local government finances – developing is concerning from growth and financial stability perspectives,” Oxford Economics wrote in a recent research note.