The government does not disclose how many properties in China are vacant.
(Photo: dpa)
The 20th National Congress of the Chinese Communist Party, which gave President Xi Jinping a third term as general secretary, was a historic turning point. The Chinese leadership has been completely reshuffled: market-oriented technocrats have been replaced by Xi loyalists. And that at a time when the economy is already faltering.
State-controlled investments in real estate and infrastructure – that was China’s strategy to stimulate the economy. But the system is reaching its limits — largely because slowing growth is causing prices for housing and office space to fall, which in turn saps growth.
This is especially true for the smaller, poorer and less developed cities. The housing prices in Chinese cities of the so-called third and fourth category have fallen by around 15 to 20 percent in the past two years. Even barring a Western-style banking crisis, the associated fall in credit will slow growth.
Real estate makes up such a large part of the Chinese economy that a sustained downturn is likely to trigger years of stagnation. This can certainly be compared to Japanese conditions. The country has been experiencing lost decades since 1990.
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Until a few years ago, the spectacular rise in house prices in China was being supported by ultra-rapid income growth, with future growth expectations pushing prices higher. If income growth stalls, China’s residential and commercial property prices could collapse like a house of cards, taking banks and local governments that have been insanely lending to the sector with them.
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Many seem to believe that China’s recent real estate crisis, particularly Evergrande’s spectacular default, stemmed from the government’s efforts to curb excessive lending.
Evergrande is one of the largest real estate companies in China.
(Photo: dpa)
But it would be more accurate to say that government policies have broadly supported house prices – for example by limiting citizens’ ability to invest in other assets. Property prices are falling simply because supply is now outstripping demand after decades of excessive construction in many areas.
China’s economic growth has been slowing for years, but the decline has recently accelerated.
Indeed, China’s current problems are reminiscent of the construction of “bridges to nowhere” in Japan in the late 1980s and 1990s. After decades of building at breakneck speed, sucking up raw materials from around the world, China now boasts a residential and commercial real estate portfolio similar to that of much wealthier countries like Germany and France.
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And gone are the days when China could justify skyrocketing housing prices and endless new construction by citing rising incomes. It is true that the People’s Republic can avoid some of the stubborn problems that defaults often cause in the West through close government control.
The government controls key information and appears to be treating data on home vacancy rates – which show the extent of development – as a state secret. But the problem has now grown to such a magnitude that not even the Chinese government can hide its implications, although they will undoubtedly try.
According to the Harvard professor, it is also in the interests of the West for China to get real estate prices under control.
China and the global economy appear to be at a turning point. Heightened political tensions, together with deglobalization, are likely to reduce productivity and increase long-term inflation around the world. With Europe headed for a deep recession and the US also looming in an economic downturn, China cannot count on exports to extricate itself from its real estate-related slowdown.
It is of great interest to the world that China finds a solution to the problem of overbuilding in its real estate sector and avoids long-term economic instability. But a soft landing seems less likely than ever given the government’s reluctance to implement market-oriented reforms.
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Kenneth Rogoff was Chief Economist at the International Monetary Fund and teaches economics at Harvard University.