The real estate market in China directly and indirectly contributes around 25 percent to economic output.
(Photo: dpa)
At the last moment, the heavily indebted Chinese real estate developer Evergrande apparently paid interest to its creditors on Friday, thus averting the default once again. Investors were relieved.
But the danger is by no means averted.
On the contrary: the ongoing crisis in the group is already spreading to the real estate market – and is threatening the growth of the Chinese economy.
The importance of the real estate market for the second largest economy in the world is enormous: The construction industry has been one of the most important growth drivers in the past 20 years. Most recently, it contributed around 25 percent to economic output, both directly and indirectly. Land sales account for about a third of the gross income of local governments. It is estimated that around three quarters of households’ wealth is in real estate.
But the Evergrande crisis seems to be shaking the confidence of many Chinese in home ownership as a valuable asset class. The months of September and October around the Chinese national holiday are traditionally high season for property sales. This year, however, the demand in the most important cities fell by 33 percent compared to the previous year.
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In smaller megacities, developers are now apparently offering apartments at high discounts. Some local governments are said to have already instructed companies not to cut prices too much. Excessively high discounts could lead to a downward spiral in the real estate market, in which the prices of used properties also fall – and thus reduce the wealth and purchasing power of many Chinese.
Problems in the real estate sector could dampen consumption
Just worrying about it could have a negative impact on consumption. However, the government has chosen the latter as an important growth driver in order to make the economy less dependent on debt and exports.
These connections show how difficult the balancing act is for China’s leadership at the moment. To a certain extent, the cooling of the Chinese real estate market is politically desirable. Head of state Xi Jinping has repeatedly warned in the past that houses are there to live in and not to speculate with.
But there is a growing risk that stricter regulation will stifle one of the most important growth drivers in the Chinese economy. The risk of political error has increased.
More: Evergrande is averting default for the time being – but the next deadline is already approaching