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China’s property slowdown sends chill through the economy

Only a few weeks ago, sales of three home developments 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 leveled off or declined as authorities tighten access to mortgages, and developers are now offering discounts to shift units, even if they lead to small losses. increase.

“Government policies do not support home purchases,” said Zhou Miao, a realtor at the Jinan branch of the PowerChina Real Estate Group. “Many people have postponed their home purchase plans until next year, hoping that authorities will ease credit control.”

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

The Evergrande Crisis, the world’s most debt-rich developer and a symbol of leverage that helped drive urbanization in China, is a government instability working on one of the core plans of the economic model. I highlighted 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, especially by cracking down on borrowing from real estate developers.

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

In all 70 big cities in China, new home prices rose only 0.2% in August compared to July. Official data showed the slowest growth rate in eight months last week. Other data highlighting the sharp decline in land purchases and sales more clearly show that government measures are beginning to bite.

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

“I think it’s different this time,” said Nomura’s Chief Economist, Tin Lu. He recently pointed out 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 at Evergrande exposed the importance of property to the Chinese economy © Tyrone Siu / Reuters

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

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

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

Evergrande’s misery highlights the importance of the real estate sector to China’s financial system, but its weaknesses and the weaknesses of hundreds of other developers in China will also have serious consequences for the wider economy. .. Real estate investment increased by 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 top regulatory agencies. Earlier this year, the government unveiled a “red line” that limits access to real estate developers’ debt and mortgage restrictions at banks as prices soared in big cities such as Shenzhen.

List of apartments for sale on display at a real estate office in Shanghai
Developers offer discounts, even if it leads to losses © Qilai Shen / Bloomberg

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

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

Beijing also sees property as an important part of promoting “common prosperity.” Last week, the Ministry of Housing announced a three-year inspection of the sector, strengthening the government’s impetus to strengthen sector control from education to technology.

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

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

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

Beyond the data, it remains unclear how central and local governments will react to the long-term weaknesses of the sectors that have created huge economic activity, jobs and wealth. In Jinan, one project has one-third of the apartments available almost two years after it started. It charges RMB 19,100 per square meter, which is below the break-even point of RMB 20,000.

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

China’s property slowdown sends chill through the economy Source link China’s property slowdown sends chill through the economy

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