We Are Now Starting To See the Depth of China’s Real Estate Problem

By Franco Faraudo

China’s property bubble has been on people’s minds for a while now. We first wrote about the complicated, secretive nature of China’s property market a year ago. This fear turned out to be well-founded. First, the developer Evergrande went insolvent under suspicious circumstances. Then China’s largest developer, Country Garden, withdrew a planned $300 million share placement, sparking more worries about the health of the sector. The Chinese government has extended loans to help keep the industry healthy, but there are still some who think that it will not be enough to support the massively overbuilt real estate stock.

China can be a difficult country to understand for outsiders. Not only are they culturally and politically unique, but since the communist party controls so many of their institutions, it can be hard to trust their official numbers. This came to light when a former deputy head of the Statistics Bureau, He Keng, said that he estimated that the current number of vacant homes in China could be as much as 3 billion units. If true, this would be a staggering number. The official estimate for floor area of unsold homes given by the National Bureau of Statistics is 648 million, or an estimated 7.2 million homes. That means that even if the number was one-tenth of Mr. Keng’s speculation, it would still be twenty times more than the official number.

It isn’t just the lack of transparency that makes China a possible property powderkeg. China has strict rules to prevent capital flight, forcing citizens to look for places to keep their money. They often turn to what is called “shadow banking,” which are institutions that exist to avoid loan restrictions. Many Chinese have turned to real estate for their investment, helping push the asset class to represent around one-fourth of the Country’s entire economy. If the massive real estate industry fails, it will take the shadow banking system with it. The fallout would have massive implications not only for China but for the entire global economic system. It stands to reason that the centrally controlled Chinese government would do everything that it could to prevent this kind of collapse, but if the speculative estimates for empty units are true, there might not be much they can do to prevent the bubble from bursting.

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