China’s property market is in the midst of a slow-moving crisis.
Real estate prices have plummeted as authorities seek to rein in unsustainable debt and market speculation. Hundreds of thousands of homebuyers are refusing to pay their mortgages for pre-sold properties as developers struggle to complete housing projects on time.
With property accounting for 15-30 percent of China’s gross domestic product (GDP), the market’s woes spell trouble for the world’s second-largest economy – and potentially global growth as well.
Why is China’s property market in crisis?
China’s property troubles are, in part, the result of deliberate policy decisions. In August 2020, Beijing rolled out a “three red lines” policy aimed at carefully deflating a huge housing bubble that had been decades in the making.
The policy had twin goals: lessening the economy’s over-reliance on property and tamping down on speculation that had put house prices out of reach for many middle-class Chinese.
Under the policy, developers were required to meet strict markers of financial health, including a 100-percent cap on net debt to equity, to borrow from banks and other financial institutions.
Many developers, it turned out, had been operating far outside the “three red lines” and were saddled with enormous debts. Suddenly unable to borrow under the new rules, the sector was met with a severe cash crunch.
In December, Evergrande, one of China’s biggest developers, defaulted on interest payments due to its offshore bondholders, followed shortly after by Kaisa Group Holdings.
Property prices declined for an 11th-straight month in July and are down as much as 30 percent compared with last year.
“What China is experiencing right now is a policy-induced crisis,” Gabriel Wildau, the managing director of risk analysis company Teneo, told Al Jazeera.
“What I mean by that is, people have been warning about a housing bubble for many years, and for good reason, but the acute stress that the market is under right now is the direct result of very draconian restrictions on lending to developers that were imposed about a year and a half ago.”
Chinese President Xi Jinping has sought to rein in China’s property sector, saying ‘houses are for living in, not for speculation’ [File: Lintao Zhang/Reuters]
The sector’s troubles have spiralled since then as cash-strapped developers have struggled to complete projects on schedule.
After beginning in the southeastern city of Jingdezhen earlier this year, protests by buyers of pre-sale properties have spread to almost 100 cities and grown to involve some 300 homeowners’ groups.
Deutsche Bank has estimated that the value of the mortgages affected by the boycotts amounts to 1.8 to two trillion Chinese yuan ($270bn-300bn), or about 5 percent of all mortgage lending.
“The crux of the problem is that property developers have insufficient cash flows – whether because of debt-servicing costs, low housing sales, or misuse of funds – to continue with projects,” Tommy Wu, the lead economist at Oxford Economics, said in a note earlier this month.
“Resolving this problem will rebuild homebuyers’ confidence in developers, which will help support housing sales and, in turn, improve developers’ financial health.”
While some analysts believe the market has reached the bottom, the sector’s woes are expected to persist for some time. In July, S&P Global Ratings estimated that property prices would decline 30 percent this year – a worse decline than during the 2008 financial crisis.
“That’s just a huge chunk of the economy that’s kind of underwater now,” Teneo’s Wildau said. “Even continuing on the pace we are on is, I think, unsustainable. It would mean growth was substantially below target for this year if it continues like this.”
Since Chinese property developers hold relatively small amounts of overseas debt, the global economy is not considered to be at a high risk of the kind of financial crisis sparked by the collapse of Lehman Brothers in the United States, said Alicia García-Herrero, the chief Asia Pacific economist at Natixis in Hong Kong.
But the size of China’s economy, which accounts for almost one-fifth of global GDP, means a major slowdown could still have a serious effect on global growth.
“The global impact is mostly due to very low growth from China, it’s not so much a financial impact,” García-Herrero told Al Jazeera.
“Of course, if Chinese banks finally can’t swallow this shock and their non-performing loans increase massively and there’s a financial crisis in China – which I don’t think will happen immediately – it will be more like Japan in the 80s and 90s. So saddled with bad loans, no credit, the economy doing very poorly, deflation – this is, I think, the scenario. So not an immediate Lehman type event.”
The World Economic Forum has estimated that every 1 percentage-point decline in China’s GDP results in a 0.3 percent reduction in global GDP.
In a 2019 study by the United States Federal Reserve, economists estimated that an 8.5 percent fall in China’s GDP would result in a 3.25 percent drop in advanced economies and nearly 6 percent decline in emerging economies.
Hundreds of thousands of Chinese homebuyers are threatening to refuse to pay their mortgages on pre-sold, unfinished properties [File: Qilai Shen/Bloomberg]
China’s economy is unlikely to experience an economic meltdown of that severity. But it could be on track for a protracted slump that drags on global growth in the coming years, according to analysts.
Teneo’s Wildau said that Chinese policymakers have tools not readily available in more capitalistic countries to avert a full-blown financial crisis.
“Chinese leaders have a much greater degree of control over the financial system and the real economy than US policymakers did in 2008. So they have the tools to stave off an acute crisis,” he said.
“They have the tools to stave off financial contagion and a complete collapse in credit flows because they can simply order the banks to lend. They can work outside the legal bankruptcy system to keep everyone liquid, to avoid disorderly chains of default.”
But Wildau said China could still be looking at years of economic stagnation, which would feel like a recession to many Chinese after decades of strong growth.
“We could just see an extended period of slow growth, something more like a Japan scenario, a sort of grinding slowdown over many years even absent acute financial distress or panic in the market,” he said.
What is China doing about the crisis?
Beijing has signalled that supporting the property market is an important task despite its determination to reduce the economy’s reliance on the sector.
At a meeting of China’s top decision-making body in July, officials said there was a need to “stabilise” the real estate market while emphasising that local governments should take responsibility to ensure pre-sold homes are finished.
Earlier this month, Chinese media outlet Caixin reported that Beijing was preparing to issue 200 billion yuan ($29.3bn) in loans to complete unfinished housing projects.
Beijing has also taken measures to boost the economy more generally, such as lowering interest rates and rolling out stimulus, including the announcement last week of 300 billion yuan ($44bn) in new credit through its state-run policy banks.
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“We expect additional funding will be arranged to support the completion of unfinished houses,” Wu, the Oxford Economics economist, said in a note.
“Indeed, the statement from July’s Politburo meeting stresses the need to stabilise the property market and to ensure the delivery of houses. We think these efforts are unlikely to come directly from the central government. Instead, authorities will likely ask local governments, banks, and property developers to coordinate and ensure that unfinished housing projects are completed.”
China’s efforts to prop up the market may ultimately be limited, with Beijing widely expected to stick to its “three red lines” and Chinese President Xi Jinping’s mantra that “houses are for living in, not for speculation”.
Wildau said China’s policymakers now faced the dilemma of whether to press ahead with their crackdown on real estate or reverse course for the sake of growth.
“If they were to embark on a bailout now, it would be rowing back and retreating on those gains,” he said.
“It would also be politically embarrassing because it would look like a reversal or an admission of error. So that’s why I think we’ve seen policy be relatively lacklustre. We haven’t seen a housing bailout that a lot of investors have been hoping for.”
OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
