Copyright © BusinessAMBE 2023

With the escalation of credit risks and the bankruptcy of several major real estate developers, the stability of China's real estate sector is under serious threat. Despite recent government measures to stimulate demand, the sector is sinking deeper and deeper into crisis.

China's real estate sector, which accounts for about 20% of the national economy, is in a deep crisis, which is no longer a secret. The government's passive stance raises questions, considering Beijing is limited to "small measures" to save the sector. So far, all these efforts have proved fruitless.

In the news: The crisis in China's real estate sector continues to worsen.

  • In October, the real estate market recorded a record drop in existing home prices, the largest since 2014.
    • In 70 major cities, the average price of existing homes fell 0.6 percent in October from the previous month.
    • This decline is stronger than that of September, which was 0.5 percent.
  • For the first time ever, the balance of real estate loans declined.
  • In other words, both supply and demand for housing are declining.

Credit risk of real estate developers

Zoomed out: Insufficient measures have been taken. In other words, Beijing is trying to put out a fire with a glass of water.

  • Several major real estate developers have recently experienced a rapid increase in their financial risks related to credit. A problem that has so far been ignored by China.
    • This increases the risk of default by real estate developers such as Country Garden. This Chinese giant defaulted on a dollar bond last month.
  • What happens if the developer, overloaded with debt, cannot service its own loans with banks? Then the entire industry is at risk of collapse.
    • If the developer has financial problems, this can delay or even halt the construction of ongoing real estate projects.
    • In response to these delays, many buyers last year stopped all their mortgage payments on homes they bought but have not yet completed. A vicious cycle.
    • In China, it is common to sell apartments before they are fully completed. According to analysts at Japanese financial holding company Nomura, about 20 million unfinished real estate units have been sold in China.
    • A huge risk for the buyer. If the ongoing real estate project is cancelled, buyers who have already paid a down payment or part of the price of their home often lose their investment.
  • In other words, "China's real estate sector has not yet bottomed out. Markets seem to have been too optimistic about recovery policies over the past two months," Nomura said.

More loans ... More risks

However: The People's Bank of China announced that it had held a meeting with other financial regulators last Friday. The goal: to approve loans to real estate developers that "operate normally."

  • This meeting is designed to prevent an unwanted drop in new loans during the last two months of the year by scheduling these loans to coincide with the start of the new year. Banks can thus stimulate economic activity at the beginning of the year and create positive momentum.
  • Regulators are also putting more pressure on borrowers - the state-owned banks - to support private groups in trouble. They are central to the country's real estate crisis.
    • These companies are not receiving the same support as their government-backed competitors.
  • But the long-term view is once again being blocked. Allowing new loans to real estate developers could lead to an increase in debt in the sector, especially if developers continue to face persistent financial difficulties. The problems of giants Country Garden and Evergrande show that no one is safe. (resume)

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