China’s property sector crisis comes amid fast changes in the global economy. China’s economic miracle might be over.
China needs to get rid of its ailing property sector to maintain growth, economist Hao Hong argued during a CNBC interview. The real estate market amount to 30% of China’s GDP and is what fueled the country’s meteoric growth over the past decades.
Hong’s analysis comes after another disastrous weekend for the dragon’s property sector. Evergrande, formerly China’s largest real estate company, defaulted on another onshore obligation for $547 million.
This is only the latest crisis hitting Evergrande since it publicly declared its financial woes in 2021. Later that year, Evergrande defaulted on its offshore bonds.
Evergrande appealed to the Chinese government for aid, only to find closed doors and little compassion from Beijing. The company had crossed the CCP’s three red lines on debt, and there was no coming back.
Noting the extent of Evergrande’s importance in the Chinese economy, the government nevertheless attempted a controlled collapse. But Evergrande’s assets remained too difficult to turn into liquidity as more and more obligations meet their maturity. As a result, the company was forced to declare bankruptcy earlier this year.
Similarly, today’s largest property developer in China Country Garden is facing imminent default. Property buyers simply do not trust developers anymore, making it impossible for real estate builders to meet their obligations.
The bubble is bursting
China’s real estate crisis resulted from decades of market speculations. Developers continued to build homes to artificially keep prices low, while rich investors on the coast kept buying more and more houses.
Eventually, however, the bubble had to burst. According to a former deputy head of China’s statistics office, there may be more housing capacity than people in China. And for a country with 1.4 billion people, the world’s second-largest population, it’s a miracle the bubble lasted as long as it did.
“Also the Chinese urbanization process,” Hao Hong said, “which has been progressing very fast in the past 10 years, is coming to a halt.”
The only solution, according to Hong, is the complete restructuring of China’s property sector. “Once people reset their expectation, and also the economy [restructures] to regrow from other industries rather than relying mostly on the property sector for growth, then we will actually have a better, much healthier Chinese economy than before.”
But this restructuring will come at an enormous short-term cost. With disappointing post-pandemic growth and increase isolationism from global markets, China might not have the economic basis to back such a restructuring right now.
The Chinese economic miracle might be over.
