China Real Estate Crisis Is Not Solved Yet – IMF

China Real Estate Crisis: The issue of real estate developers who are having serious financial issues is still unresolved. The problem of the substantial supply of unfinished homes in general has not yet been addressed.

How China Real Estate Crisis happened?

Debt fuelled the real estate crisis as builders raced to meet anticipated future demand. The housing boom promoted speculation, with new homes being pre-sold by builders who increasingly looked to foreign investors for capital. Dollar-denominated offshore bond sales increased dramatically from $675 million in 2009 to $64.7 billion in 2020. Credit risk evaluation was challenging due to opaque liabilities. Real estate in boom towns like Shenzhen were less attainable in relation to local earnings than in London or New York as a result of the speculative price increases. As a result, the government took action in 2020 to lessen the possibility of a bubble and to moderate the inequalities that expensive real estate may foster. As a result, developers experienced a cash flow issue, which was aggravated by the impact of harsh actions taken to contain Covid-19.

State officials were eager to control the industry’s debts because they were concerned that repeated defaults may devastate China’s financial system. The government started to tighten restrictions on new developer financing and asked banks to slow down mortgage lending. The introduction of new borrowing parameters for real estate companies in China changed the game. The “three red lines,” so-called because they set limits for a developer’s liabilities, debt, and cash holdings, sought to discourage careless borrowing. Because their finances were already strained, many businesses found it difficult to follow the new regulations. By the end of 2021, developers had around $207 billion in dollar-denominated bonds outstanding, or about 25% of the total amount borrowed from Chinese borrowers. Finally, the China real estate market has fallen into a crisis.

China Real Estate Crisis isn’t over yet; IMF says

BEIJING — The International Monetary Fund stated on Friday that China needed to take additional steps to address its real estate issues. About a quarter of China’s GDP comes from the real estate sector, which has slowed the country’s economic expansion, particularly after Beijing began to crack down on developers’ heavy reliance on debt in 2020. Over the past few months, Chinese authorities have begun to loosen limits on funding for the real estate industry.

According to Thomas Helbling, deputy director of the IMF’s Asia Pacific Department, “Authorities’ recent policy initiatives are encouraging, but in our view additional action will be needed to end the China real estate crisis.”

In an interview with CNBC, he continued, “If you look at the initiatives, a lot of them address funding difficulties for the developers that are still in relatively good financial health, so that would assist. “However, the issue of real estate developers who are having serious financial issues is still unresolved. The problem of the substantial supply of unfinished homes in general has not yet been addressed.

In China, apartments are sometimes sold to homeowners before they are finished. Construction was hampered so significantly by health issues and money problems last summer that several homebuyers protested by stopping their mortgage payments.

Following that, Chinese authorities underlined the need to assist developers in completing those pre-sold apartments. However, according to government data, the amount of residential floor space sold in China decreased by about 27% last year, while real estate investment decreased by 10%.

Helbling stated, “I believe that it would be beneficial to indicate to a route out and… how the restructuring may be done and who will suffer losses if there are any.” In order to handle the enormous number of unfinished flats, he also advocated for further steps.

If this doesn’t happen, the sector will continue to be risky, confine people that are overexposed to the real estate market, and tie up cash and savings, which will hinder the overall economic recovery. Helbling opted not to specify a deadline by which authorities needed to take action before things grew considerably worse.

“It’s best to address downside risks as soon as possible.”

As China’s Real Estate crisis grows, is the Global economy at risk?

With property making up 15–30% of China’s GDP, the country’s economic difficulties might have an impact on global growth as well as the second-largest economy in the world.

China’s economic issues, which are already exacerbated by Beijing’s strict “zero-COVID” rules and the weakening of global development, are made significantly worse by the country’s real estate crisis. According to some estimates, real estate makes up 30% of GDP, which is twice as much as it does in the US.

A significant slowdown might nevertheless have a significant impact on global growth due to According to the World Economic Forum, the global GDP decreases by 0.3 percent for every percentage point that China’s GDP declines.

According to economists at the US Federal Reserve, a loss in China’s GDP of 8.5 percent would cause advanced economies to experience a 3.25 percent decline and developing economies to experience a roughly 6 percent decline. China’s size, which accounts for approximately one-fifth of global GDP.