“Fixing the real estate sector could take many years or even a decade ahead of us,” Hong Hao, chief economist at Shanghai-based hedge fund Grow Investment, said above CNBC on Tuesday.
This will mean further pain for China’s real estate sector, which has been suffering from a debt crisis for two years now. The 2021 default of China Evergrande Group, one of the country’s largest private developers, sparked contagion across the sector as financing dried up. Construction stopped, prompting protests as homebuyers realized they might never get the homes they paid for.
Now that China’s economy has underperformed since the Covid pandemic, Beijing officials are grappling with how to decouple the economy from real estate without torpedoing the economy in the short term.
For much of the last decade, Chinese developers like Evergrande have gone on a debt-fueled building spree, building millions of new homes across the country. This led to an oversupply, driving prices down.
“We have built too many houses for the Chinese,” Hong said above CNBC.
Demand is also in long-term decline. Investment bank Goldman Sachs estimated in August that annual demand for urban housing in China peaked at 18 million units in 2017, falling to 11 million this year and 9 million by 2030.
On Tuesday, Hong highlighted slowing urbanization rates, with fewer rural Chinese moving to cities to work. “Two years ago we sold 18 trillion yuan [$2.5 trillion] value of the property,” he said. “This year we would be lucky if we could break even [10 trillion yuan]and going forward, we would have been lucky to draw [5 trillion] OR [6 trillion].”
Bearish holds
Hong is an outspoken commentator on the Chinese economy, who expanded his audience during his tenure as head of research at BOCOM International, a division of the state-owned Bank of Communications.
Yet Hong’s footage was censored last year amid China’s tough Covid lockdown measures in cities such as Shanghai. Hong argued that the lockdown, which has trapped millions of people in their apartments in an attempt to halt the epidemic, would hurt China’s economy and encourage capital flight.
Both WeChat, the ubiquitous messaging platform, and Weibo, similar to Twitter suspended Hong’s accounts in May 2022. Hong soon resigned from BOCOM, according to the company for personal reasons.
When Hong got a new job at Grow International a few months later, he warned that those working at state-owned intermediaries were starting to face restrictions on what they could say. “Even if you don’t tell the truth, market prices will tell the truth,” he said Reuters at the moment.
Hong’s suspension was an early indicator of Beijing’s censorship of bad economic news. This year, regulators they are asking analysts and economists have had to stop using negative language to describe the Chinese economy – thinking of “low inflation” rather than deflation – and the statistics office has stopped publishing some indicators such as consumer confidence and youth unemployment.
China’s economic recovery is stagnant. Retail sales and manufacturing grew at slower-than-expected rates for much of the year, and foreign trade collapsed. (Again, Chinese economic data beat the predictions last month, suggesting that government support measures may finally be taking effect).
The real estate crisis in China
China’s real estate sector contributes one-third of the country’s GDP. Yet the sector’s liquidity crisis shows no signs of ending any time soon.
China Evergrande, whose default probably triggered the crisis in the first place, missed a payment Monday on a yuan-denominated onshore bond. The developer revealed over the weekend that it he could not issue new debt. Chinese authorities are also investigating the developer’s former CEO and CFO, relationships Caixin.
The bankrupt developer faces a liquidation filing on October 30.
Another major Chinese developer, Country Garden, is also having debt problems. The developer, which recently has four times more projects than Evergrande Done an interest payment of $22.5 million a few days early.
Although China has eased some real estate policies in a bid to stabilize home prices, analysts believe the sector’s glory days are over.
This may be by design, as officials seek to wean China from its real estate sector. ON CNBCHong suggested that once China’s economy relies on other industries rather than real estate, then “we will have a better and much healthier Chinese economy than before.”
“Not having an overbearing Chinese real estate sector is actually good for the future of the Chinese economy,” he said.
