After Evergrande: China’s real estate market is frozen. Possible major decline in world GDP

So far the crisis of the Chinese Evergrande seems to have been overcome, in part, in the financial markets and in the world economy, but it is only an optical and propaganda effect. In reality, the Chinese real estate market, as noted by the Financial Times , appears to be completely frozen and this risks being a problem primarily for China, but also for the world economy.

Some very disturbing cracks are beginning to emerge in the Chinese real estate market, which Goldman says is the largest asset class globally, a more than credible claim, considering that Evergrande alone has theoretical real estate assets worth $ 60 trillion.

In a letter to the Shaoxing municipal government in eastern Zhejiang province, the local office of real estate developer Sunac China appealed for "political assistance" as it was fighting for what it called a "turning point in Chinese real estate."

“We have never experienced such a radical change in the external environment,” Sunac's office in Shaoxing said, indicating a 60% year-over-year decline in home sales over the summer.

"The market is almost frozen," he added in the letter, first reported by the Financial Times. "The radical change in politics and the economic environment has seriously disrupted our business and made it very difficult to maintain normal operations."

The sudden, abrupt collapse of the Chinese real estate market is shown in the graphs below which first show how building land transactions, for the first time, are down despite the increase in available soaz. So, absolutely new, there are unused building lots:

At the same time, real estate transactions in China's top 30 cities fell 45% below 2020 levels.

While the slump in transactions is induced by falling demand, there are also concerns that an Evergrande insolvency and eventual collapse could lead to a supply crisis. In July, a Chinese city stopped sales of two Evergrande projects, accusing the struggling developer of embezzling funds by depositing only part of the proceeds from home sales into escrow accounts. To ensure that Evergrande does not divert these funds, this month the Nansha District Real Estate Bureau created an escrow account under its own name to collect the proceeds of Evergrande homebuyers by cutting direct access to money from part of the developer.

Lack of funds has already led to a halt to construction of some unfinished real estate properties, triggering social unrest among buyers. In Guangzhou, buyers surrounded a local real estate office earlier this month to ask Evergrande to restart construction. Those who have even partially invested in real estate, perhaps in their own home, would like to see it over, but the Evergrande crisis together with problems in the energy sector puts production brakes that delay its conclusion. The blocking of demand risks corresponding to a blocking of supply.

Unfortunately, as Goldman Sachs points out, the Chinese real estate market has an enormous weight in China's wealth, with very close ties to both consumption and the savings and investment sector. The government has pushed towards real estate investments in the past. Here is a graph showing the case-economy links:

Goldman Sachs created three different scenarios to quantify the effect of the economic slowdown on the economy:

The effect of the slowdown in Chinese real estate will have an effect on the economy ranging from -1.5% at best to -4% at worst.

How will this disaster in China's growth spread to the rest of the world? China has acted as a huge turbocharger for global growth since the turn of the century and is responsible for over a third of the world's GDP growth.

Now China judges this growth related to real estate "Low quality", and this is also why Xi Jinping wants to contain it. But the general effects on the economy are likely to be important, and not just for China, but for the whole globe. In the worst case scenario, we could see a negative component equal to about 1.2% of the growth due to the Chinese real estate market, all at a time when post-covid growth is slowing down.

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The article After Evergrande: China's real estate market is frozen. Possible important decline in world GDP comes from .

This is a machine translation of a post published on Scenari Economici at the URL on Sat, 25 Sep 2021 08:15:28 +0000.