China’s housing crisis has sucked in both banks and provincial governments, threatening to have a bigger impact on the world’s second-largest economy, according to media reports.
Delinquencies have soared in the past 12 months after property developers’ debt-fueled growth pattern reversed, according to Nikkei Asia. About 99 domestic debt defaults occurred during the year, including late payments, according to Shanghai-based Wind Information.
It should be noted that China’s factory gate inflation in July hit its lowest level since February last year, according to the National Bureau of Statistics. The country’s producer price index, which measures ex-factory prices, rose 4.2% year-on-year in July, after rising 6.1% from the previous month, the China Daily reported. quoting the NBS.
Earlier, S&P Global Ratings warned that around 20% of the Chinese developers it rates were at risk of insolvency. The Chinese government triggered this reversal by imposing tougher restrictions in 2021 on mortgages and developers’ access to finance.
The complete lockdown of major cities under China’s zero COVID policy has put the country’s economy under pressure with rising inflation and disrupted global supply chains.
Although China refuses to acknowledge it, the country’s rigid suppression of COVID-19 is beginning to affect major businesses and industries which are suspending operations in Shanghai and other cities, the Hong Kong Post reported.
Meanwhile, new home sales fell 27% year on year in volume during the January-June half. July sales fell 13% from June and 27% from a year earlier in 100 major Chinese cities, according to real estate research firm China Index Academy, cited by Nikkie Asia.
The banks started to feel the heat. Loans to the real estate sector represent 26% of total outstanding loans in China, compared to around 21% to 22% in Japan at the height of the housing bubble. The percentage of non-performing loans held by China’s four major state-owned banks increased by more than 1 percentage point in 2021 to 3.8%.
Several real estate developers have halted ongoing condominium construction projects because they are unable to obtain cash. Yan Yuejin of the Shanghai-based E-house China R&D Institute estimated that around 4% of new builds sold in the four years to June 2022 had issues, Nikkie Asia reported.
While local governments themselves are hardly on a solid financial footing.
As tax breaks eat away at their revenue, local authorities have come to rely heavily on revenue from the sale of state-owned land use rights to developers. Land sales revenue exceeded tax revenue in 2020 for the first time in data dating back to 2010.
But cash-strapped developers cannot afford to buy land for new residential properties. Local government property revenues fell 31 per cent net year on year in the first half of 2022 and are expected to decline on a full year basis for the first time in seven years. The industry squeeze has also affected property tax revenues.
S&P Global estimates that up to 30% of local governments could be in dire enough financial straits by the end of this year to require corrective action such as spending cuts.
Real estate has been a key driver of China’s economy over the past two decades.
According to Harvard University professor Kenneth Rogoff, real estate and related businesses now account for about 29% of gross domestic product, up from less than 10% at the end of 1990.
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