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Saturday, May 18, 2024

Ghost Cities: Haunting The Chinese Real Estate Industry 

There are currently as many as 50 ghost cities and  64 million empty apartments across the country, the cities that were built but never inhabited

INTRODUCTION

Ghost cities of China

After 20 years of exponential growth, the pace of the Chinese real estate market is slowing down, and one of the signs are vacant neighborhoods and sometimes whole cities. Often referred to as Ghost Cities, these vacant towns are not abandoned; they were built, but no one ever moved in.  The economic drivers that have generated this phenomenon are complex, but perhaps the most fundamental reason is that there is no demand to live in these areas – either because of a lack of jobs, schools, and city services or because of a general over-supply of housing stock.

China’s real estate industry is currently undergoing a slow-motion collapse that has significant implications not only for the nation but also for the global economy. Ghost cities, unfinished construction projects, and plummeting consumer confidence have become visual metaphors for a crisis that has been brewing for some time.

The Rapid Rise and Fall of China’s Real Estate Market 

In February 2021, China witnessed a month-over-month increase of 133% in the total value of commercial real estate sales, which subsequently fell to a negative 1.5% from July to August 2023. This rollercoaster ride reflects the sector’s instability and the crisis it is facing.

Ghost cities of China

The Enigma of the Real Estate Sector’s Contribution to China’s GDP

Officially, the real estate sector accounts for 6-7% of China’s GDP. However, some economists estimate that it makes up a staggering 30% of the country’s overall GDP. This disparity in data underscores the sector’s outsized impact on the Chinese economy.

Distress Events and Offshore Defaults in the Real Estate Sector

In 2022, 26 property developers encountered distress events, with a rapid increase in offshore defaults, amounting to $54 billion in defaults, which is a record rate in the last 10 years. This data highlights the financial instability and vulnerabilities within the industry.

IMF’s Global Growth Forecast and Policy Challenges

The International Monetary Fund (IMF) has reduced its global growth forecast for 2024 due to China’s real estate crisis, citing it as a major problem facing policymakers. This emphasizes the far-reaching implications of the sector’s troubles on the global economic landscape.

Evergrande and the Domino Effect

One of the notable contributors to this crisis is Evergrande, a major property developer that defaulted on its offshore debt payments in late 2021, triggering a cascade effect throughout the Chinese economy and the stock market. This highlights the impact of individual company failures on the broader industry and the economy.

The “Three Red Lines” Policy and Its Consequences

In an attempt to curb the property bubble and reduce the sector’s reliance on debt, the Chinese government implemented the “three red lines” policy, restricting the ratios of debt to cash, debt to assets, and debt to equity that developers could hold. This policy had a profound effect, doubling China’s default rate from 4.4% in 2021 to 8.2% in the following year. The data underscores the policy’s significant impact on the industry.

Mixed Results from Government Stimulus

Ghost cities of China

While the central bank and government officials have tried to stimulate property sales by lowering down payment requirements and encouraging lenders to reduce mortgage rates, the effects have been mixed, with no immediate signs of a full recovery. This data illustrates the challenges policymakers face in rejuvenating the market.

Global Ramifications: Impact on Heavy Industry and Commodity Markets

The impact of China’s real estate sector extends beyond its borders. As China’s demand for raw materials like steel, cement, and glass decreases, it affects global heavy industry and commodity markets. The IMF’s recent reduction in the global growth forecast for 2024 highlights the ripple effects of this crisis.

Private vs. State-Owned Developers: A Tale of Two Challenges

Furthermore, the uncertainty surrounding the crisis is exacerbated by the differentiation between privately owned and state-owned developers. Private developers face more significant challenges and defaults. This distinction in the data sheds light on the varying degrees of impact within the sector.

In conclusion, China’s real estate industry is at a critical juncture, with a long-term challenge stemming from structural issues like declining demand due to slowing urbanization and an aging population. The lack of transparency and the uncertainty of the situation make it challenging to predict when and how the market will stabilize.The ongoing developments in China’s real estate sector are not just a domestic concern but have the potential to disrupt the global economy. Policymakers and analysts are closely monitoring this situation, as the repercussions of this crisis may extend far beyond China’s borders.

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