Chinese Citizens Boycott Mortgage Payments – Has The Housing Bubble Burst?
Nobody seems particularly put out that China’s economy grew by just 0.4% in the second quarter compared with a year earlier.
There is a lot to worry about?!
Although China’s National Bureau of Statistics (NBS) reported on Friday that the country’s economy had grown at the worst pace since the COVID-introduced first quarter of 2020, when the world’s second-largest economy contracted by 6.8 percent, there was little fanfare. Nobody seemed to be tensing up like crazy.
Economists surveyed by Reuters, since they had time to do so, reckoned China will rise by 1% in the three months to June. Chinese financial data app Win.d, which is impenetrably confusing, annoying, and impossible to verify, estimated 1.1%. In each case, everyone anticipated garbage and received much worse.
But when you put the notion of stopping everything that moves in a metropolis of 22 million people in practise and the economic effect is just too obvious to disguise, that is what will really happen. Aside from the COVID quarter back in 2020, when China stumbled at Wuhan’s early outbreak, no amount of inventive math will reverse the Shanghai and other city lockdowns that made this China’s worst quarter of the decade.
Chinese officials have set an “around 5.5%” GDP growth goal for the year 2022.
The issue for China isn’t growth or growth targets.
It’s structural.
China truly does seem to be at risk from this enormous housing bubble that has been building for years. The most recent manifestation of the monster’s actual nature is by far the most terrifying; these blatant demonstrations in the manner of localised mortgage boycotters’ organised flash mobs have gained widespread attention.
Refusing to pay any more for unbuilt homes, protestors gathered, probably hoping not to be beaten, but certainly bracing for it.
Off-the-plan purchasers of more than 250 mega-properties in over 100 cities came together this week to jointly tell realtors seeking mortgage payments for the untold numbers of unfinished, pre-sold units, “screw you jack.”
If anything, zero-COVID has shown that more than ever they can crush injustices with absolute confidence. But what might be bothersome, even disturbing for officials, is that residential dwelling values are tanking again. The statistics show that June is the 10th straight month of home value declines.
Homebuyers in 22 Chinese cities are refusing to pay mortgages on stalled projects. Banks, already grappling with developer defaults, now have to brace for homebuyer defaults. With stop-start lockdowns, construction delays are set to worsen.
Digital Zeitgeist wrote on 05/04/2022:
China’s Property Boom – Evergrande Group
China v the USA
China can build a hospital in 10 days, with a 2nd hospital almost completed, while it took the city of San Francisco 10 years to approve a new bus route! California has spent 20 years planning a rail network whereas China has spent 20 years building the largest rail network in the world!
China – Real Estate
For nearly 25 years China enjoyed a huge property boom as Chinese workers migrated from the suburbs to the inner-city factories as global demand for cheap consumerism kept rising in line with increasing foreign wealth. All these workers needed city apartments which needed to be built. So, in 1997/98 The Evergrande Group began building not only apartment blocks but entire cities to house the mass influx of workers. With domestic and foreign financial banks/institutions eager and willing to finance the projects The Evergrande Group grew from nothing to over $150 billion in just 10 years! The biggest, fastest ever rise of a Chinese company. Chinese workers raced to own their new, as yet unbuilt apartments, paying deposits whilst many paid in full with the support and backing from the Chinese government. In the 2008 financial crisis China stimulated its economy with 4 trillion yuan, giving access to cheap and easy credit. Evergrande seized the opportunity and translated its land holdings into collateral for further financing, then acquired more land, more collateral, more financing and so the cycle kept repeating ad infinitum because no-one believed that the Chinese government would ever allow their domestic property market to crash without intervention – Therefore, debt-fuelled rapid expansion! Fast forward to 2015 and Evergrande is the largest property developer in China by sales!
When Debt Becomes Unsustainable
Then at about the same time (2015/16) the economic sentiment in China completely shifted 180 degrees so that reducing national debt became governmental, fiscal policy. Not only did China accumulate huge debt but how quickly that debt was accumulated was a real concern. So, inevitably Evergrande became illiquid. We not only had half-built and empty apartment blocks but whole cities, newly built bridges and roads which lead to nowhere. China’s real estate sector accounts for about 30% of the countries US dollar denominated bonds. Then in 2020 the Chinese authorities drafted the ’3 red lines’ metric which all developers would have to meet for further loans. Of China’s 30 largest property developers 14 had breached at least one of the new metrics. In September 2021 Evergrande ran out of money and faced a liquidity scare. They finally defaulted on 9th December 2021 getting very, very close to a debt restructuring programme. Meanwhile, the governor of China’s central bank announced that they would not bail out Evergrande. A group of Evergrande’s offshore bondholders said in a 20th January statement that the developer has failed to substantively engage with them about restructuring efforts and the group will “seriously consider enforcement actions”. Then in a 24th January statement, Evergrande posted on its website that it is currently drafting a detailed restructuring plan. The company urged patience with the offshore bondholders. Two days later on 26th January they announced a preliminary restructuring in six months’ time. According to Refinitiv Data, real estate developers in China have a huge $117 billion worth of debt maturing in 2022. Beijing has resorted to ‘pushing’ state-backed property developers and government owned companies to buy some of Evergrande’s assets.
Final Thoughts
Dr Marco Metzler from Deutsche Market Screening Agentur (DMSA) warned that the collapse of the company (Evergrande Group) could spark the crash of the World Financial Market. He told The Express: “This is the first domino of the collapse of the market. It will be even worse than the 2008 financial crash. The market is much bigger than the American market.
Ninety million people could be housed in China’s empty properties.
A collapse of Evergrande will have a huge impact on the job market as they employ over 200,000 staff and hire 3.8 million people every year for project developments.
Is The Evergrande Group the catalyst for the inevitable collapse of the Chinese financial system? Evergrande owes over $300 billion – to banks and non-bank financial institutions (remember Blackrock?), domestic and international bond holders, suppliers and apartment buyers. It has bank borrowings of $90 billion, including to Agricultural Bank of China, China Minsheng Banking Corporation and China CITIC Bank Corporation. (reports have 128 banks with exposure). Thousands of suppliers are on the hook for $100 billion. Evergrande has 1,300 projects over 280 cities.
Who said, “Safe as Houses?!”
first published by Digital Zeitgeist 05/04/2022
updated by digital Zeitgeist 19/07/2022