From a great economic engine to a huge headache. The crane-filled landscapes of Chinese cities long ago ceased to be a source of pride for the Xi Jinping Government; the government now views these plumes (often long-stopped) as a concern that threatens to worsen. For now, and after the crisis of Evergrande, once the giant of the industry, rumors have reached the state-backed China Vanke, the country’s second largest promoter in terms of sales. That’s why the Government has just issued a warning to seafarers: “severely insolvent” and “non-operational” property firms will have no choice but to restructure or go bankrupt.

There is even talk of a “new real estate model” in Beijing.

“They will pay the necessary price”. The statement comes from China’s Minister of Housing and Urban-Rural Development, Ni Hong, and is directed at real estate developers in his country, which is at the epicenter of a complex crisis with global implications that has shaken the Asian giant. In a complex scenario where developers are desperate to get a lifeline from the government, Ni sent a stern message with some words that stood out for their force, as reported by CNBC: “In the case of real estate companies that are seriously bankrupt and have lost their debt, those who need to go bankrupt in order to operate must do so or comply with the law.” and it needs to be restructured in accordance with market principles.

In his statement made days ago within the framework of the annual parliamentary meetings, the minister said, “Those who commit actions that harm the interests of the masses will be resolutely investigated and punished in accordance with the law.” he said. With major real estate developers defaulting on their debts and home and property sales declining, their words and the context in which they come are also important: “They will have to pay it forward.” His message was interpreted as a warning that struggling developers couldn’t count on a big bailout.

Public attack… That’s not the only key Beijing has given to how it plans to handle the crisis. few weeks ago Wall Street Magazine (TWSJ) suggested that, faced with the “collapse” of the Chinese real estate market, the Communist Party plans to take a step forward. Like? Greater emphasis on government, a market increasingly dominated by corporations in recent years. This approach is partly linked to the real estate market during the Mao Zedong era, when the State retained key control and most of the population had their homes provided by the party itself.

One strategy could be to increase the proportion of housing subsidized by the State and then rent or sell it with a social focus. Information you manage TWSJ shows that they represent 5% of the housing stock today. The idea would be to increase this figure sixfold until it reaches at least 30%. Another plan is for the state to take responsibility for private projects in distress and then rent or even market these houses.

…and a billionaire. The plan is ambitious and certainly won’t be cheap. Analysts quoted by the New York newspaper talk about a potential cost of up to $280 billion annually in the next five years; This means global mobilization of approximately 1.4 trillion dollars.

Aside from the doubts that this large figure may raise, what Xi Chinping has made clear is that he hopes to move towards a “new model” of the sector this year, with State-promoted affordable housing playing a key role. . Specifically, there is talk of adding six million homes with these features within five years.

Document 14. In 2023, the Government issued a directive (Document 14) asking cities with large stocks of private homes to purchase unsold properties and convert them into social housing. Following an effort to convert private properties into affordable public housing, analysts are hailing the effort to ease the brick crisis and encourage births.

Since then, it has moved from theory to practice: Last December, the Development Bank announced a 202 million yuan credit line to build 701 affordable homes in Fuzhou city.

Beijing’s job is not easy. as you remember TWSauthorities are reluctant to provide direct liquidity support to developers who could inflate the real estate bubble. Additionally, the possibility of purchasing properties to convert into rentals raises relevant dilemmas, such as the price the Government should pay or the owners’ willingness to sell.

From big engine to big problem. This is the backdrop for China’s real estate sector, which has gone from being one of the biggest engines of the Chinese economy to a headache for Beijing. In its good times, it was estimated to represent 30% of the Asian giant’s GDP along with related sectors; This rate was well above the weight the industry had reached in the United States. Today, the industry is at the epicenter of a crisis that threatens to worsen and spread its consequences beyond the Asian giant.

Evergrande… and beyond. In order to curb market speculation and deflate the real estate bubble in a controlled manner, the Government established a series of “red lines” in 2020 that impose strict rules and limits on debt, leverage and liquidity ratios. The rest is known history.

The failure of major developers such as Evergrande to meet the criteria, the credit tap turning off, difficulties in accessing finance, the failure of pre-sales, half-finished buildings and protests from buyers who refuse to continue paying mortgages (an unusual sight in China) have led to the emergence of property bought off-plan and not arriving in the middle of the storm. It was taken out for homes that didn’t look like they would come. S&P Global Ratings estimated loans affected by protests at $145 billion in 2022.

Industry elders. Ni Hong’s speech is harsh and suggests that the Government will not hesitate to let the former giants of the real estate industry fall. “Those who are seriously bankrupt and have lost the ability to operate, those who need to go bankrupt must do so or restructure,” the head of the Ministry of Housing said. His words appear in a very specific context in which a significant part of the “old elite” of the national real estate industry is going through complex situations. When it’s not dramatic.

In January, a Hong Kong court ordered Evergrande liquidated. The decision was taken after the company failed to complete the restructuring agreement regarding the 330,000 million debt plan. Just a few days ago, it was revealed that Vanke, the country’s second largest developer, had merged several subsidiaries in the south of the country amid rumors about its liquidity.

Images by Mitch Altman (Flickr) and Visual Capitalist

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