A form of protest and symptoms of a deep crisis. In China, a growing number of small landlords are refusing to pay their mortgages in protest of developers accused of doubling downtime on construction sites in progress, due to their indebtedness. On July 22, more than 320 projects were taken up, in 90 cities in the country, according to Bloomberg. As Chinese growth slows, this social movement is likely to exacerbate cash flow problems for the debt-laden real estate sector, worrying the system and international analysts. Because the disintegration of the Chinese economy could affect the financial health of other countries.
Beijing is watching this strike closely. “The authorities do not want the protests to extend further, or even affect owners who are dissatisfied with the devaluation of their properties,” the agency wrote. Bloomberg, in an editorial published on July 28. In China, it is customary to pay before constructing your property. “More than 70% of Chinese homes are sold before construction is complete; owners who take out a mortgage start paying long before they receive the keys,” the financial information media continues. Thus, the state will own 225 million square meters of housing that will be completed.
At the moment, these provinces are small. “But it can spread,” warns China economist Julian Evans-Pritchard, in a note to analyst firm Capital Economics published on July 15. “And even if they don’t, they could change the behavior of banks and buyers and threaten the nascent recovery in home sales,” he says. The sector, which accounts for a quarter of China’s GDP, is going through a particularly perilous period. Since the housing reform carried out in 1998, banks have lent significantly to real estate developers. The market has exploded, but is now heavily indebted. Fearing the promoters’ over-indebtedness, Beijing has gradually tightened terms for access to credit, since 2020, drying up more funding sources for groups.
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‘Social instability’ coming?
The result: Promoters are no longer able to keep their commitments on projects in progress and are subject to a wave of defaults, like Evergrande, formerly #1, owed more than $300 billion. Faced with this situation, Prime Minister Li Keqiang, on July 22, called for “promoting the development of a healthy and robust real estate market.” He referred to the establishment of a general fund to save the sites of promoters that are facing difficulty and to prevent defaults from polluting the banking sector.
Another concern for the regime is the risk of escalating discontent as the regime relies on a promise to thrive. “Given that such a large share of Chinese household wealth is in real estate, any sharp correction in house prices could lead to social instability,” the newspaper said. time Tianli Huang is a research fellow at the Peterson Institute for International Economics (PIIE). Symbolic of the significance of this crisis, Evergrande, the former number one in real estate in China, has been trying in recent months to sell assets and reduce its stakes in other companies. Indeed, the company separated from its headquarters, which is estimated to be worth two billion dollars. The richest woman in Asia, Yang Huiyan, has seen her fortune halve due to the real estate crisis.
On a larger scale, the entire Chinese economy is slipping. “In China, the re-containment and exacerbation of the real estate crisis have reduced growth to 3.3% this year, the lowest rate in more than forty years if we exclude the epidemic,” economist Pierre-Olivier Gornchas recalls, in an IMF publication, dated July 26 .
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Given the country’s interconnectedness with the rest of the world, any contagion from the real estate crisis to the Chinese financial system would have international repercussions, analysts say. “If defaults increase, there could be significant and serious economic and social consequences,” warns ratings agency Fitch Ratings. In May, the US Central Bank (Fed) estimated that the worsening real estate crisis in China could have consequences for the country’s financial system. The Fed indicated that in such a scenario, the crisis would affect global trade.
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