HONG KONG (Reuters Breakingviews) - There’s a slow leak from China’s property bubble. A full-on crash would upend economic and political stability, but Beijing is maintaining curbs on speculation. That hard line could hobble recovery. Even then, a correction is inevitable.
China Evergrande Group, the country’s second-largest developer, just warned that last year’s profit could halve from 2018. It is cutting prices in some places by more than one-fifth, and juicing sales with exotic promotions like purchase options for a refundable 5,000 yuan ($707) deposit. Such financial razzle-dazzle is unlikely to save $18 billion Evergrande, its peers or their creditors from a brutal reckoning.
Companies in the Cninfo Real Estate Index on average are sitting on net debt worth nearly 200% of equity. The sector has $92 billion of bonds maturing this year, and $171 billion due in 2021, according to Dealogic. Defaults appear unavoidable. Property sales fell nearly 40% in the first two months of this year, the worst performance on record.
A default wave would punish bondholders, and banks could get hammered, too. Property is the collateral behind more than 40% of loans, per a Moody’s estimate. Municipal officials rely heavily on land sales to fund public services. The construction industry, a huge employer, needs projects to break ground. In 2013, when prices fell, most economic indicators followed. That presents a quandary. About three-quarters of Chinese household wealth is held in real estate; a downturn is a political problem. Prices, however, have risen so much that mortgages are absorbing an unhealthy share of middle-class incomes, and miring people in debt. Because housing outperforms all other asset classes in China, it distorts capital allocation too. While supporting property investment would boost growth, the government has maintained buying curbs in the name of rebalancing. “Houses are for living in, not speculation,” has become President Xi Jinping’s mantra.
Policymakers may assume demand can be revived with the flick of a policy switch. Perhaps, but neither short-term economics nor long-term demographics are supportive. China’s family formation rate halved between 2011 and 2018, and the population will start shrinking outright in 2027. The country has around 3 billion square meters of unsold residences, per Rhodium Group estimates, which take over two years to clear without an epidemic. Beijing might yet pump in air, but this balloon is destined to deflate.
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