China’s ‘ghost towns’ and when boom turns to bust

Beneath the bricks holding up crisis conglomerate Evergrande are China’s “ghost towns.”

As the property giant staggers under a US$305 billion debt mountain, the economic impact threatens to shake the foundations of a crucial pillar of growth. 

It also risks revealing seismic cracks in a flawed development model. 

“The root of Evergrande’s troubles – and those of other highly-leveraged developers – is that residential property demand in China is entering an era of sustained decline,” Mark Williams, the chief Asia economist at research consultancy Capital Economics, said.

“Relaxation of regulatory controls on the sector wouldn’t change this fundamental constraint. Construction, a key engine of China’s growth and commodity demand, will slow substantially over the next few years, whether or not the economy escapes the current crunch unscathed,” he pointed out.

High rise:

• Property and spinoff sectors account for as much as 30% of China’s GDP. 
• That is “far higher than in other major economies,” Williams, of Capital Economics, said.
• China builds 15 million new homes each year, The Economist reported.
• Again, that is five times as many as the United States and Europe combined.
• Added to the toxic mix are at least 100 million properties that have been bought but are not occupied.
• They could house 260 million people in China, according to Capital Economics estimates. 
• These projects are known as “ghost towns.”

Boom and bust: “China’s real estate sector has become so large that absorbing a significant housing slowdown would significantly impact overall growth, even absent a financial crisis,” Kenneth Rogoff, the American economist and Harvard professor, wrote in a commentary for VoxEU, a research-based online site.

Data from the central bank shows that at least 27% of bank lending likely goes to the property sector.

Logan Wright, the director of China markets research at Rhodium Group

Delve deeper: The property business in China has been fueled by debt. Since 2008, the world’s second-largest economy has seen “the largest credit expansion in a single country” for at least a century. 

Game of loans: “Data from the [People’s Bank of China or] central bank shows that at least 27% of bank lending likely goes to the property sector. A significant proportion of nonbank lending from trust companies and other asset management companies goes to developers as well,” Logan Wright, the director of China markets research at Rhodium Group, said.

Financial risk: From 2008 to today, China’s banks have collectively quintupled in size and added over $41 trillion in assets, equivalent to around half of the global economic output. But credit growth has slowed substantially since a concerted effort to reduce systemic financial risk commenced in 2017,” Wright wrote in a commentary for Foreign Policy.

Big picture: China’s state-run media has underlined the depth of the problem. At stake is not just the collapse of the property market but a financial calamity that could send shockwaves across the global economy. 

Living in NeverEverland: “The crisis is still playing out … [Evergrande’s] failure to pay overdue bills is a troubling sign for the entire property industry, which may spread contagion risks given the economic significance of the real estate industry to the domestic economy,” state-controlled Global Times stressed in an editorial earlier this month.

Fate accompli: “But Evergrande’s fate is still uncertain, as it has been selling [assets] to raise funds to help resolve its serious liquidity crisis,” Global Times added.

China Factor comment: Economic competence underpins the Communist Party of China’s right to rule. If that is left under the rubble of a real estate earthquake, President Xi Jinping and his “red aristocracy” will face more than a “crisis” of confidence.