The mortgage boycott could worsen the real estate crisis

welcome to Foreign Police‘s China Brief.

This week’s highlights: Why homebuyers are fed up with China mortgage pre-sale systemUS Speaker of the House Nancy Pelosi prepares for a trip to Taiwan, and the Chinese President Xi Jinping’s visit to Xinjiang reflects his growing cult of personality.

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welcome to Foreign Police‘s China Brief.

This week’s highlights: Why homebuyers are fed up with China mortgage pre-sale systemUS Speaker of the House Nancy Pelosi prepares for a trip to Taiwan, and the Chinese President Xi Jinping’s visit to Xinjiang reflects his growing cult of personality.

If you would like to receive China Brief in your inbox every Wednesday, please sign up here.

Mortgage boycott threatens to deepen real estate crisis

China’s property market was rocked this week when angry buyers threatening to stop mortgage payments on unfinished projects gained traction on social media. More than 85% of Chinese houses are sold in presale, against about 50% in 2005; mortgages begin months or even years before buildings are completed. Projects have only slowed since 2020, when China’s property market entered a protracted slump and developers began to struggle.

Some buyers across China have refused to pay mortgages for unfinished projects for months now, but this week they coalesced into a group movement. A list that started with just 30 projects grew to over 300 last weekend. Mortgages aren’t as common in China as they are in the West: only 18% of homeowners have one, and it’s more common to borrow money from extended family, who collectively invest in a property.

The move against the presale system puts up to $350 billion in payments at risk, and Chinese authorities have already moved to censor it. However, the crisis continues to be self-sustaining: as promoters’ cash flow dries up, even more projects are suspended, leaving more consumers angry and worried that they will never be completed. Authorities are now relying on lenders to bail out projects to help keep developers afloat.

But why are people willing to prepay for houses in China anyway? There is no waiting list for houses, as there is no shortage of stock; the housing vacancy rate in major Chinese cities fluctuates between 15 and 25%. The reason so many houses are empty is that many people are only buying as an investment. With no property tax and no rising house prices for decades, Chinese real estate has been extremely profitable. Some presales were reversed even before the houses were built.

This trend continued during China’s boom years; at this point it makes less economic sense, but the idea that house prices can only go up has a strong grip on the public imagination. But homebuyers were essentially poised to be the real estate industry’s biggest lender when everyone else was taking advantage. Now that the sector is struggling, buyers are no longer willing to foot the bill. The problem is that it’s not clear who else can.

Prior to this year, around 50-70% of pre-sale funding had to be held in escrow accounts controlled by the local government. (Regulations vary by city and county.) But there has been widespread collusion between property developers and local authorities, with governments sometimes using the money to fund their own projects in exchange for favors for the developers.

China’s central government relaxed the rules earlier this year, both in response to the state of the industry and in an attempt to break some of that collusion. But the changes have not been enough, nor has the rush for measures such as rate cuts that authorities have been pursuing at all levels. Home sales fell in April and May, down 59% from a year earlier. China’s major property developers are desperate for cash, as are their suppliers.

However, Chinese real estate companies are simply too big to fail. The wealth of the country’s urban middle class is invested in it. Real estate accounts for around 30% of China’s GDP. Price-cooling measures continued to fail in part because local governments feared the outcome that even a small deflation of the housing bubble might have had and had to contend with public pressure. Today, Chinese property prices are falling, but they are being held back from falling faster by pressure from local governments on developers not to sell at too low a price.

At some point, the central government may take dramatic action, including the de facto nationalization of parts of the real estate sector. On the one hand, Chinese President Xi Jinping’s natural reaction whenever there is a problem is to give the government more control. But even that will probably have to wait until next year. The party-state system’s energy is currently being devoted to internal positioning around the 20th National Congress of the Communist Party of China in the fall – and Xi’s almost certain third term.

Pelosi goes to Taiwan. U.S. House Speaker Nancy Pelosi will travel to Taiwan in August, following a COVID-19-delayed visit in April. Beijing has expressed its usual dissatisfaction with the trip, but tensions around the island are growing. The United States is increasingly expressing its commitment to Taiwan, and Beijing is increasingly annoyed by it. Residents of Taiwan now overwhelmingly oppose unification with the mainland and increasingly adopt an exclusively Taiwanese identity.

One of the potential dangers of official visits like this is that Chinese talks cast Taiwanese resistance to Chinese imperialism as the result of US conspiracy rather than human rights abuses, failed relations public and threats from Beijing. This increases the chances of radical action – from an attempt to stifle Taiwan economically to an all-out invasion. But the chances of a major crisis this year seem slim: Chinese leaders have far too much to do.

Xi welcomed his visit to Xinjiang. The cult of personality around Xi intensified further ahead of the Party Congress later this year. A visit to Xinjiang this week – his first in eight years and the first since the Chinese state launched a genocidal crackdown there in 2017 – was marked by scenes of erupting crowds in state media. Although propaganda visits with mandatory attendance and praise are a mainstay of Chinese leadership, recent coverage of Xi has been particularly image oriented.

But repeated foreign coverage of the atrocities in Xinjiang has had some effect on language – and perhaps politics – in Xinjiang, including an effort to create an acceptable image for tourists in a new accent on cultural assimilation and nationalism instead of the language of the suppression of terrorism. With Uyghurs unable to leave the area or speak freely, it is unclear whether this has made a difference in daily life; programs such as forced sterilization and forced labor show few signs of slowing down.

Chip chess. Lu Jun, the former head of the so-called Big Fund, a 130 billion yuan ($19 billion) investment firm set up in 2014 to boost China’s semiconductor industry, is the subject of an investigation, it was announced last Friday – a decision that will inevitably lead to arrest, trial and conviction. Lu was chairman of the China Integrated Circuit Industry Investment Fund, which was key to China’s goal of reaching 40% domestic semiconductor production by 2020. (The actual figure achieved was only 6 %).

Lu is one of several purged officials with ties to the powerful China Development Bank, where he spent 15 years. It is also possible that he is an internal scapegoat for the failure of national semiconductor goals. Granted, China is still investing heavily in the sector, including a second Big Fund established in 2018, but throwing money at the problem hasn’t solved it.

Youth unemployment crisis. Youth unemployment in China hit a record high in recently released June figures. Nearly one in five Chinese workers aged 16 to 24 are unemployed, nearly double the number before the pandemic. That’s a shocking figure in a country that typically suffers from labor shortages, due to a shrinking working-age population. China was already grooming too many graduates for the job market before the pandemic hit; lockdowns and the economic downturn have compounded the problem.

Yet unemployment among migrants is probably a greater social risk than among young graduates, who are already relatively invested in the existing structures of political and economic power. From personal conversations, Chinese analysts are aware of the role that high levels of youth unemployment played in the Arab Spring and similar uprisings, which have concerned the Chinese Communist Party in the past.

Didi fined. Struggling Chinese ride-hailing service Didi is set to receive a record fine of more than $1 billion for breaching privacy, which may be the conclusion of the investigation into the company after its IPO in New York. York without official permission. The end of the investigation would open it to a second listing in Hong Kong, the option favored by Beijing. But Didi still seems like a bad bet; its reputation is tarnished, local governments now favor regional competitors, and China’s zero COVID policy has dramatically reduced road travel.

There have been encouraging comments that the slowdown in regulatory action marks the end of the government crackdown on the tech industry that began in 2020. But as with any crackdown under Xi, there may be periods of tolerance relative, but the control mechanisms will inevitably do the trick.

The ease of use of Chinese technology – and the growth and innovation that came with it – is likely gone for good. Companies have to live with suspicious regulators enforcing ever-changing rules, and foreign investors are finally catching up on political risk and seeing better options elsewhere.

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