China's real estate slump deepens - " Buy one floor, get one free "

 

An advertisement at a condominium project in the Tongling suburbs reads: "buy one floor, get one free."

China's real estate slump deepens -  " Buy one floor, get one free "

Cooling of key growth engine brings risks of debt overhang into focus

SHANGHAI -- Half-built or seemingly abandoned housing projects are a common sight in Tongling, a city in eastern China's Anhui province.

"Buy one floor, get one free," read an advertisement at one site under development in the suburbs. But even with the generous offer, the 1.45 million yuan ($202,000) price tag was still too high for most people, said a local resident, explaining that monthly salaries in the area averaged around 3,000 to 4,000 yuan.

"Even if they make it somewhat cheaper, there still won't be any buyers," they said.

Unsold housing is just one symptom of the Chinese property market's deep slump, one that even policymakers have begun to admit.

The Communist Party's Politburo acknowledged "great changes in the relationship between supply and demand in China's real estate market" at its last meeting on July 24.

Nationwide sales of new housing by floor area dropped 26.8% in 2022, sliding another 2.8% on the year in the first half of 2023, according to official data.

Buyers are especially scarce in third- and fourth-tier cities like Tongling. Zhou Junzhi, an analyst at Minsheng Securities, estimated that it would take more than 13 years to go through all of Tongling's housing stock.

In a sign of deepening alarm at the property market slump, the statement issued after the Politburo's meeting omitted the usual language that "housing is for living in, not speculating," a slogan framing the government's effort to rein in the country's real estate bubble.

Real estate and its broad range of related industries generate an estimated 30% or so of China's gross domestic product. Though this drove rapid growth when demand was strong, it is now weighing heavily on the economy.

Seasonally adjusted real GDP grew 0.8% on a quarterly basis for April through June, slowing from 2.2% in the first quarter. Some economists now see full-year growth falling short of 5%.

Jiangsu Huaxi Group built a 72-story hotel in a village of about 35,000. The company was later rescued by the local government. (Photo by Noriyuki Doi)

Heavily indebted developers like China Evergrande Group were hit hard by the government's zero-COVID policy, coming atop their existing financial troubles. Meanwhile, China's population started to decline for the first time in 61 years at the end of 2022, while the market tilts from shortage to surplus.

The number of employees at mainland-listed real estate companies tumbled by around 100,000 last year from about 890,000 at the end of 2021, according to Shanghai-headquartered data provider Wind.

"Layoffs are putting downward pressure on households' appetite for spending," said Meng Lei, a strategist at UBS.

The strain on other indebted businesses is starting to show. The city of Jiangyin in Jiangsu province agreed on July 19 to buy 80% of materials manufacturer Jiangsu Huaxi Group for just 1 yuan. The company, run by the local village of Huaxi, operates textile and steel mills, and had been the economic core of a village once touted as China's richest.

In 2011, eyeing tourism as its next big profit driver, the group had built a 328-meter-tall, 72-story hotel in the heart of Huaxi. But the hotel drew few customers in an area lacking in tourist attractions, and now stands largely deserted.

Huaxi Group's last financial statement showed net assets of about 14 billion yuan at the end of September 2018. Local authorities were forced to bail it out after those assets lost value.

Financial markets are keeping an eye on the risks surrounding local government financing vehicles (LGFVs), government-owned companies set up to raise money for local government spending. Sales of land usage rights -- a crucial source of funding -- have plummeted, and cracks are appearing in the implicit assumption that LGFV repayment is guaranteed by local authorities.

Citigroup estimates China's total public debt -- including interest-bearing debt from LGFVs -- at 108 trillion yuan, equivalent to about 90% of GDP.

The Politburo said at last week's meeting that China should "formulate and implement a package of debt-clearing plans."