Power of China | Economy | East Asia
An overheating real estate market poses a significant threat to China’s economic and social stability.
In 2017, President Xi Jinping identified three crucial battles for the development of China. The main one was the reduction of financial risks. Four years later, the current state of the country’s real estate market poses the biggest threat to China’s economic stability since the Great Recession of 2008. Real estate prices in major Chinese cities are among the most expensive. in the world, and the real estate market has been a key driver of economic growth since the period of reform and opening-up.
Buying real estate as an asset has been viewed by Chinese consumers as a safe and reliable investment, and so far it has been. Many middle and upper class Chinese then buy a second and even a third house. Along with the expectation of future asset appreciation, owning a property denotes a higher status in Chinese society and is seen as a benchmark to be reached before getting married and starting a family.
In times of economic growth and prosperity, this model works well as investors see healthy returns and official GDP numbers increase. However, cracks have started to appear at the base of this societal framework, calling into question the sustainability of the Chinese real estate market and the stability of the economic system as a whole. Xi Jinping and the Chinese government have started to take corrective measures, but only time will tell if those measures can prevent the bubble from bursting. With almost 70 percent with Chinese household wealth tied up in real estate, a collapse in prices would send shock waves through the rest of society.
At one time, China Evergrande Group was the world’s largest real estate company. Today, business represents the greatest threat to the economic stability of nations. An impending debt crisis dominated the headlines and surely dominated conversations in Zhongnanhai as well. After Chinese regulators asked the country’s heavily indebted real estate developers to refinance, Evergrande found itself in over-indebtedness. The directive came at a difficult time for the company, which almost $ 3 billion in dollar-denominated debt maturing this year. As Evergrande begins to sell stakes in its business, global investors have ditched the firm’s bonds for fear of default. As this vicious cycle continues, the world will be watching whether the company will be deemed too big to fail and be bailed out by the government, or whether market forces will decide the fate of the once powerful real estate developer.
Chinese apartment building standards are notoriously low, but that’s not a problem for most investors, as many never plan to live there in the first place. Take a trip on China’s high-speed rail system between one of the country’s major cities and you’ll see dozens of empty apartment buildings littering the countryside. Beyond the remoteness of these apartments, what shocks most first-time visitors to the country is that the apparently empty apartments all have owners. In response to these sprawling and abandoned complexes, Xi has defended the concept of high-quality development, as opposed to the high-speed growth observed in recent decades. Xi knows that inflated GDP numbers don’t mean much if they don’t improve the standard of living of normal people.
Xis new common prosperity campaign attempts to correct the problem of worsening social inequalities; access to affordable housing is key. The Chinese government has launched the idea of implementing a nationwide residential property tax to cool the housing market. This idea has already been tried. In 2011, Chongqing and Shanghai both experimented with new property taxes on secondary or expensive residences. However, this plan has not been replicated nationally. While the implementation of a residential property tax can help cool the market, this plan is being pushed back inside the Chinese Communist Party itself. Many CCP officials use the property hide their wealth, and therefore, there was no political will to implement such a policy. Although recent indications point to the establishment of a property tax in the near future, as with many things in China, there is no certainty until it is announced by the party.
An overheating real estate market poses a significant threat to China’s economic and social stability. To avoid a crisis, Xi must prevent the country’s real estate bubble from bursting and subsequently wiping out the wealth of ordinary Chinese citizens. Xi’s response at this critical moment will impact his legacy for decades to come.
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