China's Ponzi-like Property Market is undermining the faith of the state

It could not have come at a better time for Xi Jinping.

The 120km train ride from Luoyang to Zhengzhou, is a display of economic malaise. The hour-long ride is dominated by half-built residential towers that pass through the windows. Many buildings look close to completion, while others are completed and have been converted into homes for families. Many more buildings are still in ruins, indicating that construction stopped long ago. Developers are short of cash and cannot pay workers or buy materials. Projects are in limbo. Families won’t get their homes.

A train journey through China’s heartland explains one of China’s most serious crises: the loss of trust in its economic model. China’s steady rise has been symbolized by the property sector for decades. Private entrepreneurs have made vast fortunes. As home values tripled, average people have seen their net worth rise. The local governments have benefited from the sale of large tracts of land to developers, which has helped them fill their coffers. Surprisingly, 70% of Chinese households are now involved in real estate.

To shake China’s growth miracle is to undermine trust in the model. This is happening on many fronts, including covid-19 lockdowns that are sweeping and a crackdown against private entrepreneurs. It is clearer than ever in the property sector, which accounts for 25% of GDP. In July, a new project starts dropped by 45% compared to a year ago. Home sales fell by 33% and property investment fell by 12%. The economic effects are spreading throughout the economy and are impacting furniture-makers as well as steelworkers. This blow to confidence is coming at a crucial time for Xi Jinping (China’s leader), who will likely be granted a third term at a Party Congress in October.

Lines in the sand

There are two immediate causes of the housing crisis. First, the government has taken steps to curb the excesses in the property industry. In a policy known as the “three redlines”, officials have limited developers’ ratios between assets and liabilities, net debt to equity, cash to short-term loans, and net debt to equity since August 2020. Many have had to stop unsustainable borrowing and sold off assets. This severely limited their ability to build and sell new projects.

China’s zero covid policy is another blow. Many cities have been forced by the central government to lock their residents up for days or even weeks when covid cases are found. The megacities Chengdu, Shenzhen, and Shenzhen were locked down at the time of writing. People are unable to view homes or make purchases due to the shutdowns. They also have an effect on the consumer’s psyche. Entrepreneurs worry about the sudden closing of their businesses. Fears of being laid off are a concern for employees. This kind of anxiety does not encourage home ownership.

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