The Rising Influence of Rising Affluence

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Hot mess in China....

Why It’s So Hard for China to Fix Its Real Estate Crisis

Beijing has often addressed economic troubles by boosting spending on infrastructure and real estate, but now heavy debt loads make that a hard playbook to follow.

At the core of China’s current economic trouble is real estate, which represents a quarter of the country’s economic output and at least three-fifths of household savings.

When Mr. Zhou, the former central bank chief, unleashed a surge of borrowing in 2016, he triggered a frenzy of apartment construction even in remote cities like Qiqihar, a fading, frozen center of artillery manufacturing near the Siberian frontier. As easy credit sent apartment prices skyward, people in Qiqihar and throughout the country felt richer and flocked to car dealerships and other businesses to spend more money.

Apartments were bought as investments to rent out, including by many Chinese families that saw an opportunity to accumulate wealth. But as more and more apartments were built, their value as rentals declined. Investors were left with apartments whose rent wouldn’t pay for their mortgages. In many cities, annual rent has been 1.5 percent or less of an apartment’s purchase price, while mortgage interest costs have been 5 or 6 percent.

Apartments in China are commonly delivered by builders without amenities like sinks and washing machines, or even basics like closets or flooring. Because rents are so low, many investors have not bothered to finish apartments over the past decade, holding newly built but hollow shells in the expectation of flipping them for ever-higher prices. By some estimates, Chinese cities now have 65 million to 80 million empty apartments.

Demand for new apartments has now plummeted, leaving little expectation that a repeat of Mr. Zhou’s measures in 2016 would quickly revive the market. The annual number of births and marriages has almost halved since 2016, eroding much of the need for people to buy new apartments.

Prices for existing homes have fallen 14 percent in the past 24 months. Prices of new homes have not fallen as much, but only because local governments have told developers not to cut prices drastically. Sales of new homes have plunged as a result.

Many economists in China now suggest that the country needs to go beyond reductions in down payments and cut interest rates sharply, far more than a tiny interest rate reduction on Monday. Deep cuts in interest rates would make it much cheaper to borrow money for a new home or car or other big purchases. It could also spur more exports, long a driver of the Chinese economy.

A risk of cutting interest rates is that Chinese companies and families would be able to earn much higher interest rates on bank deposits in other countries, and would try to transfer large sums of money out of China. That would cause China’s currency, the renminbi, to sink against the dollar, which would also make Chinese exports more competitive in foreign markets.

China cannot export its way out of economic trouble without incurring considerable hostility from governments in Europe, the United States and developing countries, which have become increasingly reluctant to accept job losses associated with a dependence on imports. But that may be a risk that China is willing to take as pressure increases for further interest rate cuts.

“Cutting interest rates is necessary,” said Xu Sitao, the chief economist in the Beijing office of Deloitte. “It is about stabilizing the property sector and offering calibrated relief to companies and local governments that are experiencing financing woes.”

Li You contributed research.

Keith Bradsher is the Beijing bureau chief for The Times. He previously served as bureau chief in Shanghai, Hong Kong and Detroit and as a Washington correspondent. He has lived and reported in mainland China through the pandemic. More about Keith Bradsher