China’s real estate crisis may threaten economic growth in 2022.Beijing is not intimidated

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The country’s GDP growth rate last quarter was the slowest in a year, with a year-on-year increase of only 4.9%. Compared with the previous quarter, the economy grew by only 0.2% between July and September-this was one of the weakest quarters since China began publishing such records in 2011.

The global shipping crisis and the disruption caused by the massive energy crunch have led to an economic slowdown.

China’s shipping delays and increasing inventories have hit smaller manufacturers, which are now losing cash, leading to lost orders and reduced production. The decline in factory output is largely due to power shortages, which is the result of a conflict between the high demand for fossil fuels and the country’s efforts to reduce carbon emissions.

However, some of the most important concerns about growth are now affecting the real estate industry, which is suffering from energy woes and government efforts to curb excessive borrowing.

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Real estate-related activities-including cement and steel production-experienced a sharp contraction last month, as did real estate sales and new construction projects. This led to a decrease in real estate investment, which contracted in September for the first time since March 2020.

On Wednesday, the National Bureau of Statistics announced that in October, the average house price of 70 major cities fell slightly from the previous month. Goldman Sachs estimates the annual rate of decline from the previous month is 0.5%, which is the first decline since April 2015.

Although the power squeeze has undoubtedly put pressure on the real estate industry, Beijing’s crackdown has also caused losses. Fearing overheating in the real estate market, the government started asking developers to reduce debt levels last year. It also promises to control out-of-control housing prices.

Since then, companies such as the troubled conglomerate Evergrande have been struggling to resolve major debt problems, raising concerns about the risk of contagion in the industry and the overall economy.

Economists at Societe Generale said that it seems unlikely that Beijing will take too many measures to loosen strict restrictions on the real estate industry-“probably because they attribute most of the blame to the power contraction, which has now been eased but not yet solve.”

“In our view, housing is the key, and there seems to be nothing substantial in the short term that can ease the downward trend,” Yao Wei and Michelle Lam of the company wrote in a report on Monday. They added, “Policy makers have a very strong consensus that housing is the source of many structural problems in China.”

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The real estate downturn will almost certainly continue to drag down economic growth. Research companies and banks have lowered their forecasts for China’s GDP for this year and next, worrying that the risk of a serious slowdown dominated by real estate is rising.

For example, the Oxford Economics Institute lowered its fourth-quarter growth forecast from 5% to 3.6%. The company recently lowered its 2022 GDP forecast from 5.8% to 5.4%, mainly due to concerns about the real estate industry, power shortages and Covid-19.

“The risk of managing a slowdown in real estate is high,” Louis Kuijs, head of Asian economics at Oxford Economics, wrote in a report on Wednesday. He added that the “relatively large economic footprint” of China’s real estate industry — it accounts for about a quarter of GDP — means that even a gradual or “controlled” slowdown will “significantly” affect the economy.

Long-term “critical” challenges

Yao Aidan, senior emerging Asia economist at AXA Investment Management, said that real estate consolidation is China’s “main long-term challenge”. He lowered his GDP growth forecast for this year from 8.5% to 7.9%, partly because Beijing has taken a firm stance on controlling debt in the real estate market and elsewhere. At the same time, he believes there are some downside risks to the forecast of 5.5% growth in 2022.

Chinese President Xi Jinping’s desire to control the real estate market is no secret. In 2017, he famously announced that “the house is for living, not for speculation.”

But the movement in Beijing gained additional momentum during the coronavirus pandemic, as the government began to worry that too much cheap money was pouring into an already highly leveraged industry. This concern led the authorities to force developers to reduce debt levels last year.

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This year, Xi Jinping also increased his commitment to narrowing the gap between the rich and the poor, stating that “common prosperity” will be the government’s top priority. This commitment has been reflected in tightening regulations for various industries, including technology and other types of private companies.

But this is also obvious in the real estate sector, as the Chinese state media blames rising income inequality on soaring housing prices.

With all this unfolding, the liquidity crunch of the weakest companies in the real estate industry has worsened. Evergrande-China’s most indebted developer- Repeatedly missed interest payments and warned that it might default.

In recent weeks, the company’s crisis has disturbed global investors, who fear that the bankrupt Evergrande may cause a domino effect. Other real estate companies, including Fantasia Holdings and Hyundai Land, have indicated that they are working hard to repay their debts.


The Chinese authorities tried to ease people’s concerns about Evergrande. The People’s Bank of China said on Friday that the company’s business was poorly managed, but the risks to the financial system were “controllable.”

Yao from AXA Investment Managers said that Beijing is unlikely to change its regulatory approach.

He said: “Beijing’s tolerance for the short-term pain caused by actions to promote long-term sustainability has surprised the market. They expect a blowout in the growth figures in 2021.” After all, the technological crackdown has already caused the world’s major Chinese companies. The value of the stock has evaporated by more than $1 trillion, but it has not slowed down.

Yao added that although the real estate market policy may be “further fine-tuned”, he believes that “the overall tightening trend will not be reversed.”

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