China’s Real Estate Sector Faces Prolonged Recovery Amid Economic Shifts

China Economy News – September 27, 2023

The challenges besieging China’s beleaguered real estate sector may not find resolution for the next decade, according to prominent economist Hong Hao, who has faced censorship due to his pessimistic economic forecasts. In an interview with CNBC, Hong, the chief economist of Grow Investment, a Shanghai-based hedge fund, discussed the intricacies of the real estate sector’s issues, highlighting the possibility of a recovery timeline spanning multiple years.

This extended path to recovery signifies ongoing adversity for China’s real estate industry, which has grappled with a debt crisis for the past two years. The high-profile default by China Evergrande Group in 2021 triggered a ripple effect across the sector, leading to a halt in construction and sparking protests from concerned homebuyers who feared they might never receive their properties.

As China’s economy grapples with the aftermath of the COVID-19 pandemic, Beijing officials are confronted with the challenge of reducing the nation’s dependence on real estate without causing immediate economic turmoil.

Over the past decade, Chinese developers, led by companies like Evergrande, embarked on a debt-fueled construction spree, resulting in an oversupply of housing units, which has placed downward pressure on property prices. Additionally, the long-term demand trend is on the decline. According to an August estimate from investment bank Goldman Sachs, China’s yearly demand for urban housing reached a peak of 18 million homes in 2017 and is expected to decline to a total of 11 million houses in 2023 and 9 million units by 2030.

Hong, known for his outspoken commentary on China’s economy, amassed a substantial following during his tenure as the head of research at BOCOM International. However, his views were censored last year amid China’s stringent COVID-19 lockdowns. Mr Hong argued that these lockdowns, aimed at curbing the outbreak, would negatively impact China’s economy and encourage capital flight.

Both WeChat, a widely used messaging platform, and Weibo, a Twitter-like platform, suspended Hong’s accounts in May 2022. Shortly thereafter, Hong resigned from BOCOM, citing personal reasons.

Hong’s suspension served as an early indication of Beijing’s efforts to censor unfavorable economic news. This year, regulatory authorities have urged analysts and economists to use less negative language when discussing China’s economy, favoring terms like “subdued inflation” over “deflation.” Additionally, the statistics bureau has stopped releasing certain indicators, such as consumer confidence and youth unemployment.

China’s economic recovery has faced stagnation, with retail sales and manufacturing consistently falling below expectations, also foreign trade experiencing a significant decline. However, Chinese economic data last month outperformed expectations, suggesting that government assistance measures may now be showing some signs of success.

The real estate sector plays a substantial role in China’s GDP, contributing up to a third of it. However, there are currently no signs that the sector’s liquidity problem will soon improve. Recently, an inland yuan-denominated bond payment was missed by China Evergrande, which is thought to have started the crisis. The developer also revealed that it was unable to raise additional debt. According to reports from Caixin, Chinese authorities are also looking into the former CEO and CFO of the business. On October 30, a petition for liquidation against the bankrupt developer will be filed.

Country Garden, another significant Chinese developer, is struggling with debt-related issues. Even though the developer had more than four times as many developments as Evergrande, he was nevertheless able to pay an interest payment of $22.5 million with only a few days to spare.

Although China has relaxed some of its real estate policies in an attempt to stabilize home prices, analysts believe that the sector’s glory days are behind it. This shift may be intentional, as officials aim to transition China away from its reliance on the real estate sector.

Personal Opinion: The prolonged challenges facing China’s real estate sector underscore the nation’s complex economic transition. While the road to recovery may be lengthy and fraught with difficulties, it’s crucial for China to evolve beyond its reliance on real estate. This transformation could pave the way for a more diversified and resilient Chinese economy in the long run. However, it will undoubtedly require careful planning, prudent policies, and a commitment to addressing the sector’s current issues.

Yuval Noah Harari

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