Why China’s real estate crisis is not comparable to the bankruptcy of Lehman Brothers in 2008

Any story told about China, a country with 1.4 billion people and whose economy has more than doubled in the last decade, always involves big numbers, huge and terrifying numbers.

There was, for example, A collective chill in September, when the debt problems of one of the largest real estate developers, China Evergrande, reached $ 305 billion (264 billion euros), the result of years of aggressive expansion. But that was only the tip of the iceberg.

The Nomura financial group estimates that the total debt of all the major property developers in China exceeds $ 5 trillion. A figure large and terrifying enough for the rest of the world?

According to Bloomberg News, there are even worse numbers: Two-thirds of the top 30 real estate companies by sales have exceeded one of the three red lines of indebtedness established by the Beijing government to curb real estate speculation, which means they are unsustainable.

China’s richest man became the ‘king of debt’

The worst offenders are Country Garden, the largest real estate developer by sales, and China Railway Construction Corporation (CRCC), which in addition to properties has built much of the country’s high-speed rail network and metro systems. Like Evergrande, CRCC has crossed all three red lines for debt.

New home sales plummet by a third

Since the real estate sector is a key engine of economic growth, contributing 29 percent to China’s gross domestic product (GDP), any major crash from it could threaten the entire economy.

But while new home sales fell 32 percent last month, as the Evergrande crisis puzzled investors, huge differences in the performance of the Chinese housing market could limit the impact of any bubble burst.

“The reason Beijing created the debt red lines was to avoid a real estate crisis like the one in the United States in 2008,” Xiaobing Wang, senior lecturer in China economics at the British University of Manchester, told DW.

According to Wang, although a crisis “would have a negative impact on people’s livelihoods, the impact on the broader financial system should be limited.”

The reason, according to the expert, is that most middle-class Chinese have much greater savings than in the West. In 2020, Chinese consumers saved on average 33.9 percent of their disposable salary, according to Goldman Sachs. And these savings have traditionally been used to speculate on the stock market and in the real estate sector.

“Normally, a Chinese household only asks for a bank loan of 60 percent to buy a property”, Wang said. This does not compare with 3-6 percent in the United States, 5-15 percent in the United Kingdom and 20 percent in Germany.

“So even if property prices fall 20-30 percent and there is an increase in defaults, the banking sector will be fine,” said Professor Manchester.

Homeowners “will suffer great losses”

Although millions of people “will have to bear great losses”, a fall in the real estate sector, which had been anticipated for years, is preferable to a crisis that affects the entire financial system, like the bankruptcy of the US investment bank Lehman Brothers, in 2008.

Since China began opening up to the world in the late 1990s, real estate speculation has helped hundreds of millions of Chinese investors become enormously wealthy. Between 2000 and 2018, the price of the median property quadrupled.

Prices for apartments in the capital Beijing have reached 55 times the value of median incomes. The Chinese housing market is already twice the size of the US housing market and, in 2019, it was worth $ 52 trillion.

Some promoters will go under

It is likely that Beijing carefully manage any collapse of Evergrande, It employs 200,000 people and indirectly supports three million jobs, to limit the impact on the economy as a whole. The company has avoided, until now and always at the last minute, defaulting on two debt obligations. Another payment term is due next week.

“Obviously, there will be some losses for the banks, but the vast majority of developers will be able to pay their debts,” Wang said.

This senior lecturer in China economics at the University of Manchester believes median property prices are unlikely to fall more than 20 percent, let alone in some cities.

This does not compare to the 50 percent crash suffered by several American cities in 2008. Although Beijing will continue to discourage speculation and even test a new property tax in some cities, Wang believes the corrective mechanism will be short-lived.

“Urbanization in China is halfway there,” he explains, predicting that rural China will continue to move to second- and third-tier cities; “As their income and standard of living increase, they will want better housing.” (I)