China’s Property Bust Compounds Economic Pain

Land sales by area declined 53% in 2022 to a level below that of 1999, the year China’s National Bureau of Statistics began releasing the data. The drop indicates the future supply of new homes will be much less than during the property market’s recent boom years.

Together, the data show without doubt that China’s giant property bubble has burst, and the downturn could continue for a while before the market reaches a tipping point. Home prices have also been declining sequentially on average across 70 major cities that the government tracks.

“The road to deleverage the property sector is destined to be long and painful,” said

Michael Pettis,

a professor of finance at Peking University’s Guanghua School of Management. “We still have a long way to go,” he added.

Chinese authorities have over the past decade tried multiple times to bring down what they have long seen as excessive borrowing by property developers and speculative activity in the country’s housing market. Each time they tried to slow the sector down, they ultimately backed away because it caused too much pain on the economy, Mr. Pettis said.

Real estate and related industries such as construction and property services in recent years have contributed around a quarter of China’s GDP, according to widely cited estimates from a research paper by economists

Kenneth Rogoff

of Harvard University and Yuanchen Yang of the International Monetary Fund.

About two months ago, after Chinese stocks and bonds plumbed new depths, the Chinese government rolled out a slew of measures to resuscitate its ailing housing market in what was seen as a dialing back of a campaign to curb excessive borrowing by property companies. State-owned banks have since showered surviving private developers with funding, enabling them to pay debts as they come due and keep their operations running.

“Real estate is an important pillar of China’s economy,” said Liu He, China’s vice premier and President Xi Jinping’s top economic adviser, at the World Economic Forum in Davos earlier this week. He said that from the second half of 2021, China experienced a sharp decline in property prices and home sales, and many developers had liquidity problems.

“If not handled properly, risks in the housing sector are likely to cause systemic risks. That’s why we intervened promptly and decisively,” Mr. Liu added. China on Tuesday reported just 3% GDP growth for 2022, and Mr. Liu said he expects the economy to return to faster growth this year as the country reopens to the world.

While the risk of another wave of developer defaults has been defused, workers that were displaced by the real-estate industry’s downturn say the damage has already been done.

Maojie Tu, a 35-year-old in Chengdu, the capital city of Sichuan province, used to be in charge of land acquisition for a large private developer. He recalls that in late 2021, the company was unable to come up with a sufficient deposit to secure a land purchase, and it subsequently defaulted on its dollar bonds last year.

Mr. Tu said his job changed from identifying and acquiring land, to disposing assets to pay back debtors. He left the company in August last year to work at an infrastructure company.

Shaozheng Li, a 32-year-old property agent, has been selling homes in Zhengzhou since 2014. He said many of his peers have gone to work in factories or become drivers for ride-hailing services. Mr. Li said a company that he set up in 2019 went from selling 30 apartments a month during the height of the property boom, to struggling to sell one a month more recently. Last September, Mr. Li sold his car for less than half of what he paid for it in 2018. “I couldn’t make ends meet any more. I couldn’t survive if I didn’t sell it,” he said.

Mr. Li said he has been reluctant to switch careers and start afresh in another industry, as he has a young daughter to support. He now sells both new and used apartments, and provides mortgage-consulting services.

China’s property-sector measures are designed to help restore potential home buyers’ confidence in the financial strength of surviving developers, which is necessary for sales to pick up again.

Economists and analysts are predicting a modest rebound in new home sales in 2023 at best, and deterioration at a slower pace at worst. They said the Chinese property market, whose rapid expansion helped to power China’s economic growth before the coronavirus pandemic, won’t see a repeat of its excesses.

They expect state-owned developers to expand their share of the country’s new home sales and eventually replace private developers as the dominant players in the market. For private-sector players, “their priority will be to deleverage and manage cash flows,” said Karl Chan, head of China property equity research at J.P. Morgan.

Even the strongest private developers will have to work hard just to “keep the cash flow stable,” said Lin Bo, vice research director at China Real Estate Information Corp., an industry data provider.

Write to Rebecca Feng at [email protected] and Cao Li at [email protected]

Land sales by area declined 53% in 2022 to a level below that of 1999, the year China’s National Bureau of Statistics began releasing the data. The drop indicates the future supply of new homes will be much less than during the property market’s recent boom years.

Together, the data show without doubt that China’s giant property bubble has burst, and the downturn could continue for a while before the market reaches a tipping point. Home prices have also been declining sequentially on average across 70 major cities that the government tracks.

“The road to deleverage the property sector is destined to be long and painful,” said

Michael Pettis,

a professor of finance at Peking University’s Guanghua School of Management. “We still have a long way to go,” he added.

Chinese authorities have over the past decade tried multiple times to bring down what they have long seen as excessive borrowing by property developers and speculative activity in the country’s housing market. Each time they tried to slow the sector down, they ultimately backed away because it caused too much pain on the economy, Mr. Pettis said.

Real estate and related industries such as construction and property services in recent years have contributed around a quarter of China’s GDP, according to widely cited estimates from a research paper by economists

Kenneth Rogoff

of Harvard University and Yuanchen Yang of the International Monetary Fund.

About two months ago, after Chinese stocks and bonds plumbed new depths, the Chinese government rolled out a slew of measures to resuscitate its ailing housing market in what was seen as a dialing back of a campaign to curb excessive borrowing by property companies. State-owned banks have since showered surviving private developers with funding, enabling them to pay debts as they come due and keep their operations running.

“Real estate is an important pillar of China’s economy,” said Liu He, China’s vice premier and President Xi Jinping’s top economic adviser, at the World Economic Forum in Davos earlier this week. He said that from the second half of 2021, China experienced a sharp decline in property prices and home sales, and many developers had liquidity problems.

“If not handled properly, risks in the housing sector are likely to cause systemic risks. That’s why we intervened promptly and decisively,” Mr. Liu added. China on Tuesday reported just 3% GDP growth for 2022, and Mr. Liu said he expects the economy to return to faster growth this year as the country reopens to the world.

While the risk of another wave of developer defaults has been defused, workers that were displaced by the real-estate industry’s downturn say the damage has already been done.

Maojie Tu, a 35-year-old in Chengdu, the capital city of Sichuan province, used to be in charge of land acquisition for a large private developer. He recalls that in late 2021, the company was unable to come up with a sufficient deposit to secure a land purchase, and it subsequently defaulted on its dollar bonds last year.

Mr. Tu said his job changed from identifying and acquiring land, to disposing assets to pay back debtors. He left the company in August last year to work at an infrastructure company.

Shaozheng Li, a 32-year-old property agent, has been selling homes in Zhengzhou since 2014. He said many of his peers have gone to work in factories or become drivers for ride-hailing services. Mr. Li said a company that he set up in 2019 went from selling 30 apartments a month during the height of the property boom, to struggling to sell one a month more recently. Last September, Mr. Li sold his car for less than half of what he paid for it in 2018. “I couldn’t make ends meet any more. I couldn’t survive if I didn’t sell it,” he said.

Mr. Li said he has been reluctant to switch careers and start afresh in another industry, as he has a young daughter to support. He now sells both new and used apartments, and provides mortgage-consulting services.

China’s property-sector measures are designed to help restore potential home buyers’ confidence in the financial strength of surviving developers, which is necessary for sales to pick up again.

Economists and analysts are predicting a modest rebound in new home sales in 2023 at best, and deterioration at a slower pace at worst. They said the Chinese property market, whose rapid expansion helped to power China’s economic growth before the coronavirus pandemic, won’t see a repeat of its excesses.

They expect state-owned developers to expand their share of the country’s new home sales and eventually replace private developers as the dominant players in the market. For private-sector players, “their priority will be to deleverage and manage cash flows,” said Karl Chan, head of China property equity research at J.P. Morgan.

Even the strongest private developers will have to work hard just to “keep the cash flow stable,” said Lin Bo, vice research director at China Real Estate Information Corp., an industry data provider.

Write to Rebecca Feng at [email protected] and Cao Li at [email protected]