Le Monde tells the real estate mess in China

The boycott of loans has become a lever of struggle for owners when the construction of their property comes to a halt. A risk for local banks and a concern for the government.

Over the past four years – we read in Le Monde – Mr. Zhang (he gives only his last name) has dutifully paid his mortgage. But each month he became increasingly resentful of the 5,800 yuan (839 euros) in monthly payments: the construction of the apartment he had bought on a 1.43 million yuan project had not progressed since the end of 2019. Together with other owners, he had tried to mobilize, first by demonstrating in front of the offices of the property developer, then at the local authorities. Without success.

So when a group of angry homeowners decided to boycott their mortgages in Jingdezhen, East China, Mr. Zhang didn't hesitate for long. On the WeChat group (the dominant social network in China) that groups the owners of the houses under construction, they have all agreed to join the movement. “ There is no other way: defending our rights before the government is useless. The only leverage we have is to stop paying , ”explains this engineer from Zhengzhou, the capital of Henan province, 700 kilometers southwest of Beijing.

A particularly effective lever: in China the movement has spread like wildfire. Since 2020, thousands of projects have been blocked due to a latent housing crisis. Today, more than 300 homeowner groups in 91 cities have announced a reimbursement strike. This is a risk for local banks, which are already facing numerous defaults from builders. Until now, economists believed that Chinese families paid better than companies.

HUNDREDS OF PROJECTS IN STALL

According to Chinese banks, 2.1 billion yuan of loans have been involved so far, but a total of 2 trillion yuan could be at risk, according to GF Securities, a Chinese investment bank. Is the crisis enough to endanger the Chinese financial system? Probably not, because the authorities keep the financial system under control and can inject liquidity if needed. But their quick reaction shows that they are taking the issue very seriously. On Monday, July 25, Chinese real estate developers saw their share prices rise after news speculated about the creation of a real estate bailout fund. Three days earlier, Premier Li Keqiang had called for measures " that promote the development of a solid and healthy real estate market ", including a state fund. According to Bloomberg, the fund is expected to be used primarily to complete stalled projects and is already endowed with 80 billion yuan, which could be raised to 200 or 300 billion yuan. On Monday, Guangzhou R&F Properties gained 9.1% and Country Garden 8% on the Hong Kong Stock Exchange.

The real estate sector threatens the entire Chinese economy: it alone accounts for a quarter of growth. But the current crisis is partly the result of the measures taken by the government: in the face of the endemic over-indebtedness of the sector, the authorities have adopted control measures that limit the possibilities for financing by the banks. This approach, which was supposed to clean up the sector, revealed the flaws in the system: at the end of 2021, Evergrande could no longer meet the deadlines of its debt, estimated at 280 billion euros …

A debt contracted with banks, investors, but also with many suppliers that the group is no longer able to pay, with the consequent blocking of hundreds of projects across the country. In Jingdezhen, the protest started from an Evergrande residence in early July. While the systemic risks of a redemption strike are limited, it could further undermine confidence in property developers.

"A VERY WEAK MARKET"

" Even if all the buyers involved stopped paying, it would only be a very small percentage of Chinese real estate loans ," said Dan Wang, chief economist for China at Hong Kong's Hang Seng bank. " The risk is rather that it is a very contagious sentiment that will hit sales hard, at a time when the housing market is already very weak ." The risk for local banks is therefore real, but not directly due to these boycotts. " The insolvency rate of households is still very low, it is the insolvencies of the promoters that are increasing dangerously “, says Dan Wang. " If people are afraid to buy apartments, more developers will have cash flow problems and risk going bankrupt ." In rural Henan province, several troubled banks have frozen savers' funds since April. While the funds are theoretically guaranteed by the central bank up to 500,000 yuan, the authorities only started organizing partial repayments in early July, after major protests.

The victims of the promoters, on the other hand, do not hesitate to report their ordeal on Chinese social networks and media. Mr. Xi, 29, is a white-collar worker from Shanghai. At the end of 2020, he bought an apartment in Wuhan for 1.7 million yuan, borrowed 500,000 yuan from his family for the initial deposit and financed the remaining 1.2 million yuan with a bank loan. He intended to move in with his partner. However, a few months after the contract was signed, construction of the residence was halted. The promoter, Greenland, failed to pay the debts.

The young man then has to pay a monthly rent for a room in Shanghai, as well as 6,900 yuan in monthly rent for a paper apartment. With a salary of 9,000 yuan, he barely has to live: “ I eat in the cafeteria and I don't spend any money. I haven't bought new clothes in two years , ”he says disgustedly. In mid-July, he too decided to join the reimbursement strike. “ At first I was desperate. Now I'm rather resigned: I think the authorities have lost all credibility , “he says.

(Extract from the foreign press review by Epr Comunicazione)