The crisis in China’s real estate sector is having an impact on the economy

The crisis in China's real estate sector is having an impact on the economy

The real estate sector in China is still in a deep crisis. This shows the financial difficulties of another real estate group in the country. The sluggish economic recovery in the world’s second largest economy is likely to further aggravate the situation.

Last week, Country Garden failed to make two interest payments due on loans. The company now has a period of 30 days, otherwise bankruptcy is threatened in September. At the weekend, the group also announced that it would suspend the listing of around a dozen bonds from this Monday.

Risks of bankruptcy increase

The company’s share price on the Hong Kong Stock Exchange plummeted yesterday because of an impending default and the enormous debt that Country Garden has piled up. Country Garden is one of the country’s most important construction companies, employing tens of thousands of people. At the end of last year, the group had put its debt at 1.15 trillion yuan (around 150 billion euros). According to the rating agency Moody’s, debts of 31 billion yuan will be due in the coming year. The rating agency upgraded the default risk last week.

The Chinese real estate sector therefore appears to be far from easing. This is also shown by the example of Evergrande: The construction giant only presented balance sheet data that had been withheld for a long time in July, after the company had already encountered payment difficulties in 2021. A loss of the equivalent of 72 billion euros was incurred in the past two years. According to the latest data, the mountain of debt has grown to the equivalent of 300 billion euros. The auditors see the group’s survival as “not assured”.

Real estate boom and price spiral

Since the 1990s, construction has been going on in China at breathtaking speed. At the same time, real estate prices rose dramatically. In metropolitan areas, the prices for residential real estate have multiplied within a few years. According to a study by Harvard University, living space in the important business location of Shenzhen costs 40 times the average annual salary. For many Chinese, the dream of owning their own four walls can only be financed with large loans. At the same time, real estate is still considered a hedge against inflation and is also used as an object of speculation.

The construction sector has now become an important pillar of Chinese economic output. However, due to the Corona crisis and the month-long lockdowns, many construction projects in China did not make any progress for months. China’s state and party leaders are now frantically trying to curb the over-indebtedness of the construction companies and stimulate construction activity again. Stricter financing requirements for banks for construction companies were initially issued at the end of 2022, but were then relaxed again. In the meantime, many state billions are flowing again as cash injections to the highly indebted companies.

Can the government stop the downward trend?

It is doubtful whether this can really stimulate the sector and thus the Chinese economy sufficiently. Investments in the real estate sector fell by 8.5 percent in July, according to the latest government data. The state leadership’s dilemma is compounded by the weakly growing Chinese economy and rising unemployment in the country. China’s gross domestic product (GDP) only increased by 0.8 percent from the first to the second quarter of 2023.

China contributes the most to the global economy

And the weakness of the Chinese economy will almost automatically become a problem for the global economy. China is the world’s largest exporter and the largest importer to the US, the world’s largest economy. China also remains an important trading partner for the EU and Germany. According to data from the International Monetary Fund (IMF), the share of China’s economic output adjusted for purchasing power in the global economy was 18.48 percent last year. This means that the share is also higher than that of the USA, which only had 15.6 percent. If China’s real estate sector and the Chinese economy falter, the global economy is also at high risk.

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