Let’s clearly see the consequences (for us too) of the crisis in the Chinese real estate market. The fact that the Chinese, especially the younger generations, have lost their faith in the future and no longer invest in real estate puts the real estate sector in a difficult situation once again. deep crisis

“Homes are for living, not for speculation,” was Chinese President Xi Jinping’s warning in 2017, following his decision to tighten lending rules against real estate speculation. The crisis in the industry in China has been evident for some time, and the Communist Party has taken action to slow down the freewheeling market. And if we observe the unstable economic situation in which the Asian giant is currently, the situation may worsen. After four decades of strong growth, China is in a complicated moment and has fallen into deflation as a slowdown in domestic spending undermines plans for a post-Covid economic recovery.

What does it mean that China is in deflation and what does it change for us?

The high youth unemployment rate, which reached 21.3 percent last July, further worsens the situation. At least in urban areas, given that the data China started publishing in 2018 did not include rural areas. But it is now difficult to know how the job market for young people aged 16 to 24 is and will go: The Chinese government has decided to suspend the publication of monthly data on youth unemployment. Motivation? In the statement made by the National Statistics Office, “The economy and society are constantly developing and changing. Statistical studies must be constantly improved.”

But then we took a step back and communicated about the data of September 15, which contradicted the negative forecasts: a spokesman for the Statistical Office announced that in August there was an improvement in the labor market and the urban unemployment rate was recorded at 31 percent. cities decreased by 0.1 points compared to July, reaching 5.2 percent.

What do these data tell us? Having invested economically and psychologically to establish themselves in a highly competitive business world, young Chinese have lost faith in the future. If their parents and grandparents invested their savings in bricks and mortar, Chinese Generation Z is deciding to spend their meager financial resources on their free time. According to consultancy firm Mintel Group, since the beginning of 2023, young people born after 1995 have been steadily increasing their spending on so-called “unnecessary consumption”.

Dangers to the global (and Italian) economy

Young Chinese consume to avoid thinking, without investing in bricks and mortar. The decision that crashed the construction market. However, what happened to the real estate sector is the result of various negative factors (triggered by the Covid-19 pandemic) and policies that were too lenient to begin with. As confidence in China’s construction industry collapsed, home sales also collapsed, leaving developers without much-needed liquidity to complete construction work and meet interest payments. A situation that led Chinese giant Evergrande to file for bankruptcy in a New York court. The case was reminiscent of the scandal that broke out in 2021, when there were fears of a “Lehman Brothers moment” for the Chinese economy. Evergrande, China’s second-largest real estate developer, is burdened by $305 billion in debt and the fate of the Asian giant’s economy.

However, if China’s real estate bubble bursts, its repercussions will be reflected in the global economy. China is the world’s largest construction market and financial difficulties are feared to spread to other sectors of the economy and foreign bondholders. The real estate market is actually closely linked to the country’s main industries, local governments and national banks, as well as investors and homeowners. 2021 data showed that China’s largest real estate developers have accumulated trillions of dollars (trillions) of debt, causing alarm among economists and investors alike over fears of financial instability.

If China’s construction bubble bursts, a chain reaction would be triggered. If properties are not purchased by future tenants because they are not completed by developers, suppliers and workers are not paid. As such, their purchasing power weakens. In a global economy that is tightly connected and interconnected with a large and diverse market like China, the decline in the purchasing power of the Chinese also leads to a decline in European and Italian exports. The consequences of this also fall on our companies (according to data from the Farnesina Economic Observatory, Italy’s exports to China reached a value of 9.7 billion euros in the first half of 2023).

How has the Chinese real estate market developed?

But let’s take a step back to understand how the plight of the Chinese real estate industry came to be. The construction market has been an important driver of the national economy since China began opening its markets following the reform era initiated by Deng Xiaoping. Heralded by China’s entry into the World Trade Organization in 2000, the following years were marked by a series of state reforms that led to the privatization of small and medium-sized “State-Owned Enterprises”, that is, companies owned by China’s central government. also like that of home. In 1998, China is led by CCP General Secretary Jiang Zemin, flanked by Premier Zhu Rongji, the architect of the restructuring of state companies in the 1990s.

In 1998, a historic change occurred: Premier Zhu began reforming the real estate system, allowing every Chinese person to buy a house. This puts an end to the system of state housing allocation: before the reform sought by Zhu, housing was given free of charge to employees of state companies. This historic change lays the foundation for the emergence of a thriving real estate market. It is an industry that immediately faces several problems: Construction contractors are expanding because they are in debt.

A five-story house standing alone in the middle of a new highway was demolished in Wenling city, east China's Zhejiang province, on December 1, 2012 (LaPresse)

Let’s explain better. Chinese real estate giants sell the houses that Chinese people buy in cash, as a project. The system will continue as long as the economy improves and the Chinese are willing to invest in bricks and mortar to ensure they have a small treasury they can use in case of emergencies. Over the years, workers, bureaucrats and employees of public enterprises began to invest in the real estate sector at very advantageous prices. In a country driven by “socialism with Chinese characteristics”, real estate is becoming a source of enrichment. In a short time, hundreds of real estate developers were born with the desire to get rich thanks to bricks.

In the world of real estate sales, where house prices are rising exponentially, brick giants do seemingly simple but disastrous business. From tier-one metropolises to rural areas, property giants are increasing their debt to buy new land and invest in other sectors (such as healthcare, media and even football), relying on the security of endless loans from state banks. But something is wrong. With the expectation of getting richer, construction companies are proposing more and more real estate projects, but they are not implemented. Therefore, houses are not built and there is no return to the developers.

China’s real estate sector is in crisis (again)

This triggers a system that pushes developers to take on debt and pay off old debts by accumulating new ones. Because construction giants pay for housing construction with loans, with the promise of paying off the debt after the sale of the house. Lenders are provided by Chinese banks as well as local government-backed lenders (LGFVs), which were created to get around the government’s ban on direct lending. These institutions are able to circumvent the ban on direct borrowing because they do not report accrued debts on their official balance sheets; This allows local governments to borrow well beyond permissible limits.

Thus was born the central government’s so-called “hidden debt”, which has become a nuisance for Beijing. In fact, these institutions manage to circumvent restrictive credit measures affecting brick-and-mortar companies that Beijing introduced between 2017 and 2020 to curb speculation by construction giants. The central government thus prevents heavily indebted real estate developers from borrowing money from banks for future projects. Without loans, construction companies fall into a liquidity crisis, meaning they cannot pay their debts. And so Chinese buyers find themselves living in unfinished homes, a symbol of the bankruptcy and indebtedness of many construction companies.

The role of the absence of property tax

But it’s not just the connection between property developers and lenders. China’s construction industry has boomed thanks to the lack of property taxes. There is currently no nationwide housing tax in China; This allows many families and individuals to purchase second or even third homes.

President Xi Jinping himself would support the idea of ​​introducing a property tax, which risks further cooling the real estate sector and creating cascading effects on the economy. The first official proposal for a property tax appeared in the 2013 Third Plenum resolution: it has since been included in the five-year legislative plans of the 12th and 13th National Congresses and in the 2015 annual legislative plans of the legislature. -2018, but only as a preparation project.

The party must, first of all, conflict with the citizens. The measure has long sparked controversy among Chinese families, as currently only commercial homeowners pay a small tax. And this move could mean the end of the fortunes of property developers who use homes for speculation rather than for (dignified) living.

Source: Today IT