By Jin Ge
Real estate developers are having a hard time now as the property market is frozen at the lowest transaction volume since 2008. Some developers have already started to lower their sale prices as much as 15 to 30 percent, but that angered their previous customers who organized protests and crashed their sales offices (“The Occupy Property Sales Offices Movement”). But some developers are still betting on the eventual rescue from the government, just like how it happened in 2008. But this market has reached a much more extreme point than 2008. The transaction volume of China’s property market already went over 5.8 trillion yuan in 2010, doubled from 2008. The real estate developers, seeing an implicit government put, leveraged up as much as they can, and the whole industry borrowed around 7 trillion yuan this year alone from banks, shadow banks, and underground loan sharks.
The question that is hot in the economist circle these days is whether the Chinese government “will” save the property market again, but I want to raise the question whether it “can” save it again.
Song Weiping, the boss of Green City which is one of most aggressive and leveraged real estate developers in China, recently wrote a public statement against the rumor about the possible bankruptcy of his company. He blamed the government for not recognizing the importance of the property market to the whole economy. “If we real estate developers fail, how can all the small companies that supply our materials survive? How can the millions of migrant workers get their salary and go home for the Spring Festival? How can the millions of people who accumulated their wealth in the property market in the past decade handle the disappearance of their wealth?” said Mr. Song.
Mr. Song’s statement was met with mixed responses. Some sees it as an insidious threat basically suggesting that the property market will drag the whole society down if it collapses. But others agree that China has no choice but to save the property market and those who got rich from it, if China wants to avoid an economic disaster. I think Mr. Song is not over-stating the case: the Chinese economy is indeed held hostage by the property market. Since the easy profit in the ever-rising property market has been so enticing, many entrepreneurs from the manufacturing sector gave up their old business and put their money into land speculation and usury. All the local governments that invested in infrastructure projects with no cash flow are also betting that their income from land sale will cover their debt. And the recent investigation reports on the shadow banks and underground high-interest loans, which became rampant this year, revealed that it’s none other than the real estate companies that are borrowing at 30%, 50% and even 90% per year interest rate.
Besides millions of construction workers, common people in China are also deeply involved in the property market. According to a new report by the National Bureau of Statics in October this year, 88% of Chinese households own property. In the past several years, the market has made a fool of anyone who remained skeptical about the endless rise of property. Moreover, people are witnessing the value of their savings being eroded everyday by inflation, so many of them bought several apartments and use them as store of value.
But precisely because so many people believed in the “Too Big to Fail” story, particularly after the government’s stimulus program not only saved property price in 2009 but also doubled it, the whole real estate industry has fearlessly leveraged to the extreme. Now it will take another stimulus program with a credit creation that is at least double the size of that of 2009 to save it.
According to Angroup, a leading think-tank in China, the whole real estate industry borrowed over 6.8 trillion yuan in the past 10 months, a large percentage of which came from highly-leveraged Private Equity fund, trust fund and high interest underground loans. Meanwhile, the total worth of unsold properties amounts to 1.45 trillion yuan at current price. Even if the developers are able to sell all of their stock, it will not be enough to cover their debt.
And their cash flow problem is even more astonishing. Among the 133 listed real estate companies in China’s stock market, 80 companies have less than 1 billion cash. No wonder people like Green City’s Mr. Song cannot pay back the money they owed to the construction workers and their suppliers.
Where can the government get trillions of yuan to bail out the real estate developers? Although the central government has a relatively solid balance sheet, the local governments have already accumulated at least 11 trillion yuan debt during the infrastructure investment frenzy in the past several years. And the ambitious welfare housing projects, which I will discuss in detail later, is another financial burden on the government.
Of course there is no such thing as an independent central bank in China, and theoretically there is nothing that can stop the Chinese government from “printing money” to keep the bubble going forever. But inflation has already caused a lot of public discontent, and there is significant political cost for the government to keep flooding the society with cheap money. All of China’s economic problems are political in essence. To explore the dilemma that the government faces concerning the property bubble, I will write another post on the politics of China’s property market later.