… about 80% of Chinese people’s wealth is in the form of real estate, totaling over $65 trillion in value — almost twice the size of all G-7 economies combined. A significant slowdown could, therefore, have a substantial impact on citizens’ financial health.
To him, Chinese people have “played around with leverage, debts, and finance, and eventually created a mirage in a desert that will soon entirely collapse.”
In December, [Ren Min University Professor] Xiang challenged the government’s official economic growth estimate of 6.6%, saying it was actually just 1.67% — or possibly even negative — in 2018. He then went on to warn of a potential crash in the property market.
Owning a house or apartment signifies that a man is eligible for marriage in today’s China. Home ownership also happens to be one of the last “safe” investments where Chinese people can park their excess income, in hopes of enjoying a tidy profit from property value appreciation. In China, investment options are severely limited — which distorts the entire economic system to the point of almost total inscrutability to outside analysts.
If Chinese Real Estate Values Collapse, What Then?
… almost half the bank loans are tied to housing assets that are neither being lived in nor churning out rental income. According to the stress test conducted by the professor, a 5% fall in housing prices would take away 7.8% of the actual asset value of occupied houses, but 12.2% for unoccupied houses. “If housing prices keep on falling, the damage to unoccupied residences accelerates even more than the occupied [ones],” Prof. Gan said in the report.
… Those who think China could experience a more difficult downward cycle point to a number of factors, including an aging population and unfavorable global environment, but high debt levels are a chief concern. It now stands around 270% to GDP, of which the corporate sector — especially in real estate — represents over 160%.
… The pause in the upward property cycle, according to Jin of Mizuho, has “dashed” the hopes of making quick profits in the housing market. As a result, “homebuyers’ sentiment can only get cooler.”
Zhang Zhaohui, a 30-year-old public relations specialist in Beijing, is among those whose appetite for buying a home has cooled. She had been planning to buy her first apartment sometime in the next year, but the recent downward moves in the property market have spooked her.
“It was quite scary to see that real estate prices in some cities had gone down as much as 20% last year, making me wonder if China’s property market is about to collapse,” she said. __ https://asia.nikkei.com/Spotlight/Cover-Story/China-s-housing-glut-casts-pall-over-the-economy
Even the hint of reduced property prices is enough to stir rumblings of insurrection inside today’s China. We have seen this time after time, striking fear deep into the hearts of China’s regional government officials. But the real estate bubble trap is too far along for governments and party officials to escape. It simply has to take its course all the way to collapse — unless someone with authority decides that a more disciplined form of deleveraging is necessary to reduce long-term political risk.
China Can Avoid Debt Crisis, But Not Economic Stagnation
China is guilty of the vast misallocation of resources, for which it must pay a significant price — just as the USSR before it.
… a growing number of analysts believe that this may be the year that China’s economy breaks. As always, I am agnostic. There is no question that China will have a difficult adjustment, but it is likely to take the form of a long process rather than a sudden crisis. __ Michael Pettis
The USSR was broken by internal forces of division and discontent. China — in its current form — has barely 40 years of development and decline leading up to its current problems. The USSR broke after 70 years. China may have a number of decades of stagnation and rising internal discontent to suffer through.
One Belt One Road (OBOR) Accelerates China’s Dilemma
The largest threat to the CCP’s control over the Chinese people has always been internal division between power players at all levels of party, government, and military control. Chairman Xi has attempted to remove all obstacles to one-man rule for life, but in China nothing is simple or final.
The global extension of Chinese power via the OBOR fiasco simply creates a large number of remote power centres where would-be strongmen and warlords can build their cadres of loyal henchmen. The traditional Communist Party method of controlling such impulses is by “making an example of the upstarts.” The rise and fall of Bo Xilai is instructive in this regard.
Now imagine a dozen or more Bo Xilais scattered from Greece to Panama to Sri Lanka to Kenya. If Chairman Xi continues along this expansionist path, the scattered harvest will be bitter in time.