hina is facing a real estate crisis.
It’s wrecking China’s economy.
And there’s very little the Chinese Communist Party can do to stop it.
Welcome to China Uncensored. I’m Chris Chappell.
China’s real estate crisis is getting
bad. So bad, it’s having a major ripple effect across big segments of the Chinese economy.
There are protests. Lots of protests.
People in China are boycotting their mortgage payments.
More on those protests a bit later.
First, here’s the background to what’s happening: People bought homes while
they were still under construction—mostly apartments in big complexes like this.
Well, in reality, more like this.
See, “For years, property developers never had to worry much about funding.
Access to credit was easy, and about 90 percent of new homes were ‘presold.’
Buyers would hand over deposits and make mortgage payments before construction was complete.”
Developers are supposed to use that money to finish construction.
But over the last year or so, a lot of them have *not*
been finishing construction. They ran out of money, and stopped building.
Which means millions of people across China made down payments,
and are paying the mortgages, on apartments they can’t actually live in yet.
People would often be enticed to buy a new apartment after
going to an exhibition and looking at models.
Yes, models... ...but also models.
Because some real estate developers were using tactics like
parading women around in lingerie to sell apartments.
Yes, you can trust a company that exploits women
to be completely aboveboard when selling you a home.
But real estate developers across China have stopped building many
of the apartment complexes part way through—and might never finish them.
The reasons for that are complex. Here’s the simple version:
Big real estate developers borrowed billions of dollars to build apartment buildings. They
borrowed some of that money through pre-selling units to ordinary homebuyers. But they borrowed
*most* of that money from banks and private investors, and by issuing bonds to foreigners.
One of the big developers is called Evergrande. They borrowed more than $300 billion.
But all that debt left Evergrande way over-leveraged,
like the guy who used 19 different credit cards to buy a Korblox Deathspeaker in Roblox,
and then realized maybe he couldn’t actually pay his credit cards off.
Evergrande started to run out of money at the end of 2021.
And that meant they didn’t have money to finish construction
on a bunch of apartment complexes they already sold to homebuyers.
In February, Evergrande had promised to finish 600,000 new apartments in 2022.
But now that’s not going to happen.
And the sinkhole keeps growing, because it turns out Evergrande
has more hidden debt that investors didn’t even know about.
And it’s not just Evergrande.
Lots of other big developers are in the same kind of financial trouble.
They can’t finish the projects they started. Like me, with that jigsaw puzzle of Taco Cats in Space
that’s been sitting, unfinished, in the corner of my living room since two months into the pandemic.
And there’s not much hope on the horizon. Because given developers’ lousy track record,
people are not that interested in buying homes from them anymore.
“In the first half of 2022, sales for China’s 100 biggest property developers fell 50 percent.”
And people who already bought the homes are now protesting. They made down payments, and are
currently paying off the mortgages. Meanwhile, they can’t move in, because the homes have not
actually been built yet. So they still have to pay the rent on wherever they’re living now. And
they can’t sell the home they just bought, because who’s going to buy it? The money is just...gone.
So homeowners are banding together in protest—and they’ve stopped paying their mortgages.
“In more than 100 cities across China, hundreds of thousands of Chinese homeowners
are banding together and refusing to repay loans on unfinished properties.”
It’s “one of the most widespread acts of public defiance” in China we’ve seen...
since 1989. And you know how that one turned out.
One estimate says the “boycotts could affect about $222 billion
of home loans...or roughly 4 percent of outstanding mortgages” in China.
But the problems caused by China’s developers defaulting on their debt
are actually much bigger than these protests. And the problems are starting
to have a huge ripple effect that could wreck many other parts of China’s economy.
More on that after the break.
Welcome back.
Big real estate developers have simply stopped construction on thousands of apartment complexes
in over a hundred cities across China, because they’ve run out of money.
And it’s having a massive ripple effect.
It’s one thing if a few big developers go under. I mean,
Who really cares about these mega corporations, right?
But here’s the thing. The property sector accounts for about 30% of China’s GDP.
And a ton of other businesses are tied to property development.
With construction halted,
it hurts the big companies that make cement and steel and equipment.
It also hurts medium size companies—contractors, landscapers, furniture sellers.
And it hurts the little guy—electricians, carpenters, plumbers.
So this construction problem is leading to massive unemployment.
And it comes at a really bad time, because the Communist Party’s Zero Covid policies
have also caused massive unemployment and the destruction of small businesses.
Last month, China’s youth jobless rate hit a record high.
This whole thing also hurts China’s GDP. And that makes Xi Jinping sad.
So what’s the Chinese Communist Party to do? Throw money at it!
China’s central bank is seeking to mobilize $148 billion to bail out these real estate projects.
But it’s not a bailout. That headline is a little misleading. The government is not actually giving
developers a $148 billion gift. The Chinese central bank is *loaning* local banks about
one fifth of that amount at low interest rates, and then telling the banks to figure the rest.
“Under the plan...the banks will use the [central bank] loans along with their own funds,
lent at market rates, to refinance stalled real estate projects.”
Perfect. So real estate developers borrowed too much money, and they’re going under
because they can’t pay their loans back. So the solution is to LEND THEM EVEN MORE MONEY.
If I borrowed your car, and crashed it, would you loan me another car?
The answer should be no. But it’s actually yes,
because the Chinese Communist Party is forcing you to.
And that seems to be the best solution China can come up with for now. Those apartment
complexes—the ones where people already bought some of the units—they need to get finished.
Because ultimately, the way developers generate revenue is by selling units. Everything else is
just borrowing. And developers can’t sell units if they can’t finish building units.
I know, this sounds like everyone is in a tight spot.
So to make it as easy as possible for developers to get low-interest loans,
China’s central bank has cut interest rates by 10 basis points.
Cutting interest rates means banks can loan out money more easily.
That’s good if authorities want to kickstart lending quickly.
But it’s also going to cause its own ripple effect.
Cutting interest rates would make inflation worse.
China’s consumer inflation is already at a two-year high.
Since the beginning of this year, central banks in the US and Europe
have been *raising* interest rates, as a way to slow down the crazy inflation.
But in China, the central bank is *lowering* interest rates.
Why?
Because “home sales fell by double digits” in July.
And China’s central bank “seems to have decided it now has a more pressing problem.”
I get it. You’re in a building that’s flooding, but is also on fire. So...pour more water on it!
There’s no good solution here. Except, of course, for the developers to finish
building the apartments they promised. And to do that, they need money.
But even if they finish all the current construction projects,
it won’t fully solve China’s real estate problems.
Remember how Chinese people are protesting? And they’re boycotting their mortgages by
refusing to pay them off until their apartments are ready to move into?
Well...in China, you can’t protest without consequences.
Sometimes those consequences are the police beating you up a little.
And that’s if you’re lucky.
See, the Chinese Communist Party has a social credit system that “punishes
infractions—such as failure to repay loans—by limiting an individual’s ability to travel,
get their children into school or borrow from banks in the future.”
So people who stopped paying their mortgages may not be able to borrow in the future.
And they might even be punished by being blocked from moving into the apartments
they initially started paying for. And they could lose their down payments, too.
And the ripple effect of *that* is it will hurt
future home sales in China. There won’t be as many people willing or able to get mortgages.
And if China’s real estate developers see a slowdown in home sales because people
can’t get mortgages, the developers won’t have the money to finish the apartment buildings.
Which means apartments will not get finished. Which means
we’re right back where we started. But now the cycle is permanent.
And now it’s time for me to answer a question from a viewer who directly supports China Uncensored.
The best way you can help keep this show going is by contributing to us through Patreon or Locals.
Your contributions really add up, and they allow us to keep the lights on here. And as a perk,
you can ask questions for me to answer on the show.
Today’s question comes from Jim Bulger on Patreon.
“I saw a video today that put forth the theory that some of the covid lockdown in china were
really just a joint government/banking operation used to keep people locked up and unable to go get
money from their banks, which were defaulting due to risky investments that collapsed during the
initial covid scare. do you see this as plausible? is there any evidence to support such a move?”
Interesting question, Jim.
Over the past couple months,
some local banks have been freezing people’s accounts. It’s still not clear why.
However, I haven’t seen any evidence that China’s Covid lockdowns themselves were initially a way
to keep people from going to banks. I don’t think that’s likely, since nowadays people mostly spend
money electronically. People don’t usually show up at a local bank branch to get money.
People ARE showing up at banks to protest,
though—the people who want their accounts unfrozen.
And in response, some officials turned their Covid health codes
red, requiring them to stay home and preventing them from using public transit.
In other words, officials have used Covid as an excuse to prevent people from protesting.
That’s different from saying all the lockdowns over the past two years were originally about
stopping protests. The lockdowns were intended to stop the spread of Covid.
And as a side bonus, they’re a convenient tool to track and control 1.4 billion people.
Thanks for your question, Jim.
And thank you to everyone else who supports China Uncensored by contributing through
the crowdfunding website Patreon, by pledging a dollar or more per episode.
Or by supporting us through Locals.
I’m Chris Chappell. Thanks for watching China Uncensored.