China’s Property Market is in Freefall
Despite the recent gloom in Chinas property market, policymakers are well-equipped to stave off a full financial crisis. They have not announced any large-scale support for the real estate sector, yet, but they are saving at a record rate.
Chinese policymakers have tools to stave off a full-blown financial crisis
The Chinese government has a number of tools at its disposal to ward off a full-blown financial crisis. These include requiring developers to meet strict financial health markers, including a cap on the ratio of net debt to equity. This approach has its risks, though. For example, an abrupt default by Evergrande could upset legions of home buyers in China, and unnerve foreign investors in the property market.
The most immediate tool that Chinese policymakers have is increasing support for the economy and maintaining ample liquidity in the financial system. It should also coordinate international efforts to support the economy and stabilize financial markets. The latest data indicate that credit growth in China was weaker than expected in May, reinforcing expectations for more monetary easing by policymakers. Meanwhile, imports plunged to their lowest level in almost three years.
They haven’t announced large-scale support for the real estate sector
The property market in China is still struggling, with many apartments sitting empty, and a government crackdown on speculation has caused a number of developers to default on their bonds. While the economy is showing signs of improvement, the property sector remains among the most vulnerable sectors in China.
In an effort to boost the real estate market, local governments have announced a flurry of incentives. These include tax rebates, cash rewards and lowered down payments. For example, in Zhangshu city, developers are getting the equivalent of $150 in commission for every sale, while in Guyuan city, property sales tax rebates are being offered to first-time home buyers.
They haven’t repaid their debts
China hasn’t repaid their own debts despite the fact that they issued bonds to raise money for development. However, many of these bonds were never paid off, and China is currently in default. For a long time, most people forgot about this fact, but now it has become a weapon in the trade war.
As more countries default, the developed world is going to feel the brunt of the situation. However, China is facing the biggest blow. They have managed to get away with their bad decisions because interest rates were so low, but that’s no longer the case. And unlike in the West, China doesn’t have any processes in place to deal with their home defaults. While this might sound like a bad thing for the country, some people consider their authoritarian structure to be a strength and a way to play the long game.
They have high savings rates
China’s national savings rate is among the highest in the world. It can finance high levels of domestic investment, but can also create large external imbalances if the money is exported. The high savings rate in China has several causes, including the one-child policy, a changing demographic landscape, and rising income inequality. As a result, savings will be under pressure in the future. But policy efforts can reduce the pressure.
Last week, China’s property market plunged. It echoes the situation in the U.S. around 2007-2008, and reflects a similar pattern of imbalances in the property market. Chinese investors have long placed most of their money into real estate, putting almost 70% of their wealth into the asset class. The high homeownership rate in China has also led to enormous increases in property valuations. The country’s average price-to-income ratio is now 27X.
They have a zero tolerance policy toward COVID
China has adopted a zero tolerance policy toward COVID, a highly contagious viral disease that can be transmitted by blood. The policy involves strict on-spot testing and quarantine. Once a case of COVID is detected, the building in which the individual lives is sealed off and all nearby people are quarantined. In one case, a cleaning lady of a residential complex in Shanghai spent four nights in a bathroom without a COVID test. Another case involved an elderly woman who used a public bathroom with an out-of-date travel code. The policy also affected factory workers and office workers who had spent the night in a factory.
However, China’s zero-tolerance strategy is facing some challenges. Though there are already a handful of outbreaks in multiple provinces, the zero-tolerance policy is likely to face its biggest test in the next few weeks, when millions of people will travel across the country for Chinese New Year festivities.