China’s real estate crisis is breaking out with a boycott of homebuyers

(Bloomberg) – Former UBS Group AG economist Jonathan Anderson once called it “the most important field in the universe”.

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More than a decade on, Chinese property has once again caught the attention of global investors – this time for all the wrong reasons.

Signs of growing tension this week in an industry that accounts for about a quarter of the world’s second-largest economy have rattled China’s credit markets, dragging down the nation’s bank reserves down and commodities from iron ore to copper go up.

Following optimism earlier this year that regulatory easing could avert the industry’s debt crisis, investors are becoming spooked by the coronavirus shutdowns and boycotts. homebuyers for mortgage payments on stalled projects. The bigger worry is that a widespread loss of confidence in real estate will put enormous strain on China’s economy and financial system, which already has 46 trillion yuan ($6.8 trillion) in assets. ) mortgage debt and still 13 trillion yuan for the country’s loans. developers.

“Property has been getting worse and worse over the years; Craig Botham, chief China economist at Pantheon Macroeconomics in London, said. “The chronic recession has now taken it a step further. Ultimately, it will always hit the financial sector, given the prevalence of collateral in loan books with large real estate sections. “

What started as trouble with China’s Evergrande Group is now mired in a crisis that threatens to engulf much of the country’s developers, its biggest lenders and a wealthy middle class. significant assets associated with the real estate market. According to data released on Friday, China’s house prices have fallen for the 10th consecutive month.

“The whole pyramid is collapsing now,” said Anne Stevenson-Yang, co-founder of J Capital Research Ltd., “The whole pyramid is collapsing now,” said. Evergrande a year ago, it is spreading throughout the Chinese economy.”

This week’s turmoil has destroyed what is already one of the world’s most stressed industries. The average yield on China’s US dollar debt, which is dominated by developers, has risen to nearly 26%. Selling has also spread to investment-grade builders, with bonds issued by China Vanke Co., the nation’s second-largest construction company by sales, falling to a record low of 81.6 cents compared with the dollar on Tuesday.

China’s Covid Zero policy is exacerbating the situation by reducing demand for assets and dampening economic activity. Lockdowns are still common in China, which continues to follow a policy of containing the virus with strict measures. A recent outbreak in Shanghai has raised concerns that the city may be headed for another crackdown.

How China’s real estate developers got into such a mess: QuickTake

Fears that a mortgage boycott will lead to a surge in souring loans pushed China’s bank share index to its lowest level since March 2020.

Chinese authorities held emergency meetings with major banks this week to discuss a mortgage boycott due to concerns that more buyers might follow, according to people familiar with the matter. this problem. Some lenders plan to tighten their mortgage lending requirements in high-risk cities, two of the people said.

Xi’an Housing Ministry has become one of the first government agencies to address the issue publicly, saying it will penalize developers who cause social trouble by failing to deliver projects.

According to researcher China Real Estate Information Corp, homebuyers have stopped making mortgage payments at at least 100 projects in more than 50 cities since Wednesday. Shujin Chen.

Betty Wang, senior economist at Australia & New Zealand Banking Group Ltd., writes: “If more homebuyers stop making payments, the widespread trend will not only threaten the health of the financial system but also create social problems in the current economic downturn”. in a Thursday note.

Banks are rushing to reassure investors that the risks from home loans to homebuyers are manageable, with at least 10 companies issuing statements. State-owned Agricultural Bank of China said it holds 660 million yuan in delinquent loans for unfinished homes, while smaller rival Industrial Bank said. 1.6 billion yuan mortgage was affected, of which 384 million yuan was due for payment.

Nomura Holdings Inc. said the refusal to pay mortgages stems from the common practice in China of selling homes before they are built. Confidence that projects will be completed has weakened as investors’ cash crunch deepens.

Nomura economists led by Ting Lu estimate that Chinese developers have only delivered about 60 percent of the homes they sold between 2013 and 2020, while loans were in those years. China’s mortgage rose 26.3 trillion yuan. GF Securities expects that up to 2 trillion yuan in mortgages could be affected by the boycott.

China’s credit market is entering a new phase of suffering

Housing in China has gone from certainty over the past two decades to a growing threat. The government has removed leverage in the property industry, driving up refinancing costs for developers and triggering a record wave of defaults. Home sales fell 41.7% in May from a year earlier, with investment falling 7.8%.

The real estate industry has too much impact on the economy. By some estimates, when related sectors such as construction and real estate services are included, real estate accounts for more than a quarter of China’s economic output. About 70% of household wealth is held in property, along with 30-40% of bank loans, while land sales account for 30-40% of local government revenue, according to Pantheon Macroeconomics’Botham .

The worsening crisis will test the authorities’ ability to reduce fallout. Earlier this year, China set up a stabilization fund to assist financial firms in distress as risks to the economy increased. Handling such issues will also be key for President Xi Jinping ahead of the much-anticipated leadership talks that will cement his rule for life.

Friday’s data will likely show that economic activity in the second quarter was the weakest since the historic drop in the first three months of 2020 when the pandemic first hit. Economists predict GDP could grow 1.2% in the second quarter from a year ago, down from 4.8% in the first three months of the year.

The construction slowdown is also affecting demand for building materials. Iron ore fell more than 8% on Thursday, to below $100/mt for the first time since December. A year ago, iron ore was trading comfortably above $200/mt, with the Covid-era stimulus wave China creates boom for real estate and steel market. Construction rebar futures fell in Shanghai to the lowest level since 2020. Copper fell on Thursday.

(Updated with comment, price sharing throughout)

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