Why it is life or debt for China’s economic miracle
Real estate risks threaten to create a nightmare scenario for Xi and the Party elite
Fears are growing that China’s economic miracle could be buried in the rubble of a property crash.
The speed and scale of debt-ridden developers have shaken the real estate industry at a time when the country is battling the spread of the Covid-19 Omicron variant. Already there are concerns that the property crisis threatens to spill over into an economy mired in the red.
For Beijing’s political elite, this is a nightmare scenario that could rock the foundations of the ruling Communist Party and shatter President Xi Jinping’s credibility.
“Everyone made the same bet on inexorably rising property prices, especially the developers, who levered to the hilt, overpaid for land at auctions, and scooped up as much real estate risk as they could take on,” Michael Pettis, a finance professor at Peking University, told The Guardian media group last month.
“The problem, of course, is if property prices ever stop rising, because everyone has made the same bet everyone’s balance sheet starts unraveling at the same time, and it immediately becomes a systemic problem. That is what has happened in China,” he said.
Risk factor:
- Real estate giant Evergrande has been forced into a fire sale of assets to pay off US$300 billion in liabilities.
- The developer now has the dubious distinction of being the most indebted company in the world.
- Kaisa is another major property group that has hit the headlines.
- It has outstanding loans of at least $12 billion.
- Shimao Group and Guangzhou R&F Properties are other developers in serious trouble.
- In fact, the value of China’s real estate is matched only by Japan’s in 1989 before the bubble burst, Reuters’ Breakingviews reported last year.
China is said to have enough vacant properties to house the entire Canadian population of 38 million, and more.
Edward Chancellor of Breakingviews
Bubble trouble: “While the grounds of the Emperor’s palace in Tokyo at the bubble’s peak were reportedly worth more than Canada’s entire real estate, China is said to have enough vacant properties to house the entire Canadian population of 38 million, and more,” Edward Chancellor wrote for Breakingviews.
Boom and bust: “With household and corporate debt at higher levels than in the United States on the eve of the subprime crisis [in 2007] and history’s greatest real estate bubble set to burst, Xi looks to have few options. After four glorious decades, China’s economic miracle looks finally to be ending,” Chancellor said.
Delve deeper: Still, the problems plaguing the property sector are just the tip of a Titanic-like iceberg. Data released last year by the Bank for International Settlements revealed that overall debt in China has increased 13-fold in the past 15 years. It is now nearly three times the size of the entire economy.
Red tide: “The true levels of China’s debt go far beyond the real estate sector. At the end of 2020, China’s foreign debt, including US dollar debt, stood at roughly $2.4 trillion,” Antonio Graceffo, of the LETU American University in the Mongolian capital of Ulaanbaatar, said.
High rise: “Corporate debt is $27 trillion, while public debt exceeds 300% of GDP,” Graceffo, the author of Beyond the Belt and Road: China’s Global Economic Expansion and A Short Course on the Chinese Economy, wrote in a commentary for foreign policy website War on the Rocks.
China Factor comment: Winter is certainly coming for Xi and the Party in the shape of an economic blizzard. Time for the rest of the world to wrap up warm.