People believe the economy is improving as long as they see the housing prices increasing, the automobile market flourishing, and see packed restaurants, regardless of the accelerating deterioration of the environment, food safety, income disparity, and price inflation.
The banks have been raising deposit interest rates to attract customers. That has resulted in a tighter control over real estate-related loans, which has an immediate impact on real estate sales. Some have realized that it is difficult to sell their homes, and there is barely any way to further increase prices.
Over time, the popularity of the real estate market has been dropping. The stagnant market also sank China’s local governments deeper into debt, since most of them rely heavily on real estate (from selling land and from real estate taxes) for revenue.
Compared to the loss of income from the lowered real estate sector, the money saved from the regime’s anti-corruption campaigns (otherwise corrupted)—as propagandized as they are—is just a joke. Many local governments would have gone bankrupt had the central government not been aiding them by over issuing money. But such aid cannot solve the debt problem. Currently, most local governments have stopped paying debts, including bank loans and supplier bills. They are in effect already bankrupt.
Local governments desperate
By the second half of 2014, local governments, desperate for revenue, had lifted limits on real estate purchases to stimulate the real estate market. But the regime soon learned that no administrative measures could significantly drive up real estate sales due to the tightened control on loans. The local governments then urged the banks to loosen loan policies, but could not change their minds.
At the end of Q3, 2014, under the pressure of local governments, the Central Bank of China published guidelines to support more relaxed real estate loan policies. Despite cheers and hopes to revive the real estate market, such guidelines provide no actual constraint on commercial banks.
On the contrary, the banks used the guidelines to collect mortgages, instead of granting more loans. After October 2014, more people have given up hope that the real estate market will ever recover, as it did in 2008 and 2009. With no additional funds to stimulate housing sales and to bring in tax income, the local governments are now in despair.
What the real estate tycoons are doing is a good indicator of today’s real estate market in China. At the end of the 20th century, the regime was determined to use the real estate market as a major economic pillar and as a main source of income. But due to a much smaller monetary supply in the country at the time, the policy only created real estate hot spots in a few areas.
At that time, the best-known Hong Kong real estate businessmen, Li Ka-shing, entered Mainland China’s market to hoard land. Later on, Chinese business people who became rich—thanks to the increase of exportation after China joined the WTO—started to form groups to make speculative investment in the real estate market (examples include merchants from Wenzhou City, and coal bosses from Shanxi Province).
In the meantime, foreign capital flooded into the Chinese real estate market due to a series of favorable policies. Shanghai and other governments promised foreign investors high returns and risk protection on real estate investments, and allowed them to receive large amounts of loans with little capital.
On top of the high profit rate, the government stimulus of 4 billion yuan (US$640 million) in 2008 attracted even more foreign capital into China’s real estate market. As housing prices sky-rocketed and land sales soared, early investors like Li Ka-shing found the value of the land they had purchased over a decade ago multiplied hundreds of times. With seemingly unlimited capital from all those sources, numerous residential and commercial properties were built all over the country.
But investors are holding back now.
Since 2012, newly entering foreign capital has been switching away from real estate. Local real estate bosses such as Wang Shi and Pan Shiyi are also systematically reallocating their capital as they see the high risk in today’s real estate market.
Vanke Corp, the largest residential real estate developer, is moving capital abroad by developing and selling property in other countries. Hong Kong developers, like Li Ka-shing, are also fleeing Mainland China by trying to sell property unnoticed, while still praising China’s real estate market. But since they have hoarded so much property, most of them have to sell at a very low price in hopes of selling faster. This shows that investors who entered China early are eagerly looking for ways out.
To make things worse, since less new capital is entering the market, buying power has plummeted. Against a backdrop of overall economic slowdown and increasing cannibalization from virtual businesses, demand for commercial property and office buildings are declining. The market has become stagnant.
If you missed it, here is Part 1 of The Chinese Economy Besieged and Embattled: the Real Estate Market.
This article is first of a series by the mainland China netizen-author “Born 0715″ at the Institute of Chinese Economy and Culture Study. It is translated from the original Chinese article.