The alarm bells are ringing louder. Last week, hundreds of depositors gathered in front of the Zhengzhou branch of the People’s Bank of China in the provincial capital of Henan, demanding their frozen life savings held in rural banks. A day later, tens of thousands of homeowners threatened to stop paying mortgages on scores of unfinished housing projects they had purchased. All of this happened in a week where the officials reported lacklustre second-quarter economic performance.
China’s economy is facing a dangerous cocktail of stalling growth, high unemployment, spreading mortgage payment strikes and continued Covid shutdowns that threaten to explode with serious social and political consequences.
The worsening meltdown in the country’s debt-laden property market is at the heart of the problem as the toxic $300bn (£250bn) debt pile unleashed by last year’s collapse of the giant developer Evergrande slowly infects the whole economy.
The initial official response to the bank demonstration was to call in squads of plain-clothed enforcers to use violence to break it up. Authorities have since claimed the bank has been taken over by “criminal gangs” and have promised to start allowing access to money.
When it emerged last week that homebuyers across the country were banding together to refuse payments on mortgages on homes left unfinished by debt-distressed developers, it was the another sign that the faith of ordinary Chinese people in the property market and wider banking industry is beginning to dissolve.
“Why do I have to pay mortgage when the property I bought has yet to be finished?” said one angry social media user after watching a viral documentary about how hundreds of homebuyers in central Chinese city of Xi’an have to live in unfinished apartments.
Under pressure, Beijing’s regulators vowed last Thursday to help local governments finish property projects on time. By Monday, the government was reportedly coming up with measures to allow homeowners to temporarily halt mortgage payments on unfinished property projects without affecting their credit scores.
This is a precarious moment for China’s ruling Communist party in the run-up to its 20th party congress later this year, because it signals falling confidence in a year that was supposed to prioritise stability, said Diana Choyleva, the chief economist at Enodo Economics, a macroeconomic consultancy in London.
“Homebuyers’ refusal to pay mortgages on unfinished properties across cities in China and the mass protests in Henan by bank depositors demanding their savings back and condemning government corruption are another manifestation of the huge challenges Beijing faces at present,” she said.
A broken economic model
For years, property has been a key driver of China’s inexorable growth, with prices rising steadily for decades and offering a seemingly one-way bet to guarantee income growth for the new middle class. China’s property market accounts for an estimated 30% of its economy.
However, that relentless expansion can no longer be taken for granted, as Friday’s weak GDP numbers showed. Repeated lockdowns of major cities to contain the Omicron coronavirus variant have taken a heavy toll. Lanzhou, a city of almost 4 million in north-west China, became the latest when it announced a weeklong lockdown on Wednesday, while the threat of further paralysis hangs over megacities such as Shanghai.
The government in Beijing has responded in recent weeks by laying out plans for another massive splurge on infrastructure projects worth up to $70bn, an injection of spending that may keep central committee’s prized headline growth figures ticking over.
Many economists and China observers now agree, however, that Beijing’s borrow-and-build economic model is broken and that more infrastructure is the road to ruin rather than one to a sustainable future. For many years now, Beijing has tried to pivot to more consumer spending and innovation to drive a new era of growth rather than more steel-and-concrete white elephants. That, again, has proven challenging.
The crisis besetting the property industry is the perfect illustration of the problem. The government has pulled every lever it can to contain the slow collapse of Evergrande, which began last year when the company admitted that “changing market conditions” meant it could no longer make repayments on its debt mountain.
The story has somewhat faded from view behind a morass of restructuring and absorption of troubled parts of the empire by state-owned companies, but even Beijing’s all-powerful bureaucrats cannot stop the poison spreading, as several key developments showed last week.
First, the mortgage rebellion shows that householders have become desperate as they see unfinished homes bought off-plan falling in value while developers struggle to stay afloat. Figures from the research firm China Real Estate Information Corporation suggest that the mortgage strikes are affecting at least 100 residential property projects in 50 cities.
In a research note, Capital Economics said the strikes reflected anxiety about whether homes will be completed “as well as some discontent about declines in new home prices, which have left many buyers sitting on paper losses”. It estimated that construction has been halted on about 13m apartments during the past year, indicating that some 4tn yuan of debt ($600bn) – or about 10% of the total – could be snarled up in the crisis.
Second, home sales are still in the doldrums and show little sign of recovery amid Covid lockdowns, rising unemployment and uncertainty about the delivery of completed homes. Sales fell at a slower rate in May than in previous months but are starting from a low base, having plunged to their worst level since 2006. From January to May, property sales were down 23.6% on the same period the year before.
Third, there is trouble brewing in the financial markets, where investors are fearful that there are more corporate busts to come. The concerns sent the value of bonds sold by property companies falling sharply last week, along with property shares on the Chinese stock market.
One troubled firm, Shimao, this month missed a payment on a $1bn bond, blaming “significant changes to the macro environment of the property sector”. Country Garden, the biggest developer of all, saw a bond due for redemption in 2024 fall to less than 50 cents on the dollar, according to data from Bloomberg.
Even the mighty Shanghai-based Greenland, which owns prestige schemes all over the world, including Pacific Park in Brooklyn and the Spire in London’s Canary Wharf, has been dragged into the mess. Last month it was downgraded to “selective default” by the rating agency S&P Global, after it extended the maturity of its $500m bonds by one year.
Questions are now being asked about whether the country’s opaque banking system will be able to withstand the impact of bad debts on such a massive scale – especially as outrage grows among the population.
Loss of confidence
The protests are another sign of the loss of confidence in the system that has created a huge amount of wealth in China but which now looks increasingly precarious. Many experts think the banking system will absorb the losses with help from the central government, but the rapidly worsening balance sheets of local governments, whose sale of land parcels to developers was the starter motor for the country’s stratospheric growth, are yet another area of concern.
Dan Wang, chief economist at Hang Seng Bank in Shanghai, said policymakers in Beijing were now facing a “huge dilemma” in solving the homebuyer crisis. “80% of China’s residential housing was built with prepaid schemes. So even if the central bank would like to salvage the sector, it’d be impossible to do so without lowering mortgage rates.
“They will also need to find ways to lessen property companies’ debt pressures without loosening the official ‘three red-lines’, a strict policy aimed at constraining property developers’ debt. It’s difficult.”
Although the indebtedness varies from region to region, the crisis is serious enough for the rating agency S&P to warn that municipal China faces a “showdown” as falling revenue from land sales and the massive cost of Covid lockdowns – local governments are expected to pick up the tab for mass testing – come home to roost.
“We calculate that 10% to 30% of local and regional governments will run up against prudential thresholds on fiscal risk by end 2022,” the analysts said, meaning that they might not be able to repay their debts and could be placed in special measures by central government.
