China’s real estate slowdown cools the economy

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Just a few weeks ago, sales of three real estate projects in Jinan, eastern China, skyrocketed. But in September, one of the busiest months to buy a new home traditionally, I felt sick.

Project sales have stabilized or declined as authorities tighten access to mortgages, and developers are now offering discounts for moving units, even if they cause small losses. to augment.

“Government policies do not support home purchases,” said Zhou Miao, real estate agent at the Jinan branch of the PowerChina real estate group. “Many people have postponed their home buying plans until next year, hoping the authorities will ease credit controls.”

Jinan’s problem, with a population of 9 million, is part of a nationwide cooling that has swept through China’s real estate sector and has supported the country’s economic growth for decades, but reduced debt. However, we are currently under pressure from Beijing as we try to reduce prices. Control.

The crisis of Evergrande, the world’s most indebted developer and a symbol of leverage that has helped spur urbanization in China, is government instability working on one of the fundamental planks of the business model. I underlined my position.

After initially lowering interest rates in response to the coronavirus pandemic, the government has sought to avoid the risk of an asset bubble over the past year, including cracking down on borrowing from real estate developers.

He also added mortgage limits and rent caps in major cities. In cities like Jinhwan, where agents estimate it can take up to two months for a mortgage to be approved, authorities are placing their own restrictions on lending.

In China’s 70 major cities, new home prices rose only 0.2% in August from July. Official data showed the slowest growth rate in eight months last week. Other data highlighting the sharp decline in land purchases and sales show more clearly that government measures are starting to be felt.

For many economists, a housing slowdown poses a serious risk to the sector, which accounts for 28% of China’s gross domestic product, according to the Bank of America. It is a through demand for goods, labor and debt. Among the most important economic indicators in the world.

“I think it’s different this time,” said Tin Lu, chief economist of Nomura. He recently pointed to a “rapid deterioration” in China’s asset data and compared it to the 1970s attempt by former US Federal Reserve Chairman Paul Volcker. ..

The debt crisis in Evergrande has revealed the importance of real estate to the Chinese economy © Tyrone Siu / Reuters

“If there is a severe recession and a financial crisis occurs, of course they [authorities] It’s come back to some extent, but it’s not there yet. “

Lu pointed to data showing that new home sales in August fell 24% year-on-year in 30 cities and land sales fell 53% in volume in 100 cities. Both indicators deteriorated in early September, he said.

Declining sales Hit the EvergrandeWith nearly 2,000 billion RMB ($ 390 billion) in debt, it desperately needs cash to meet its obligations to its suppliers and creditors. An angry investor landed at the Shenzhen headquarters last week and demanded that the money be returned to him as expectations of failure rose.

Evergrande’s misery highlights the importance of the real estate sector to the Chinese financial system, but its weaknesses and the weaknesses of hundreds of other developers in China will also have serious consequences for the economy at large. .. Real estate investment grew 7% in 2020, supporting an industry-led recovery ahead of other major powers.

The flip side of its economic contribution was the threat of instability that prompted warnings from major regulators. Earlier this year, the government unveiled a “red line” that limits access to restrictions on debt and mortgages by real estate developers in banks as prices soared in major cities like Shenzhen.

Developers are offering discounts, even if it results in losses © Qilai Shen / Bloomberg

China has been trying for years to dampen speculation in the housing sector. Housing Minister Wang Meng Hui said in January that China will not use property to support the economy, reiterating President Xi Jinping’s 2017 slogan, housing, is for “living” rather than speculation . Recent government Cancellation of land auctions In large cities after previous constraints unintentionally caused price increases

“This time around, policymakers appear to be sticking to credit management metrics,” said Helen Chao, head of Asian economic research at Bank of America. “This time, the slowdown was” mainly caused by the policy tightening. Was done. “

Beijing also sees property as an important element in promoting “common prosperity”. Last week, the Housing Ministry announced a triennial inspection of the sector, bolstering the government’s momentum to strengthen oversight of the sector, from education to technology.

The broader economic recovery from the pandemic is still incomplete, and the Chinese economy is under increasing pressure due to the turmoil of a series of new recent infections that reveal prolonged weaknesses in consumption.

Lu said the decline in land purchases is likely to affect real estate investment and demand for building materials, as well as the income of local governments selling land to developers. However, others have pointed to the link between a campaign for common prosperity and Beijing’s approach to property.

“Beijing has more considerations than an economic perspective,” said Larry Fu, Macquarie’s chief economist for China. “No bad data for 2-3 months will be created [it] To loosen [monetary policy]”.

Beyond the data, it’s still unclear how central and local governments will respond to long-term weaknesses in sectors that have created enormous economic activity, jobs and wealth. In Jinan, a project has a third of the apartments available almost two years after its start. He charges 19,100 RMB per square meter, which is below the breakeven point of 20,000 RMB.

“Our top priority is to improve cash flow, not profitability,” said a company official.

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