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Date: 27 January 2022 Author: Patryk Szczotka

Is Chinese Real Estate Market Situation a Symptom of PRC’s Economy Problems?

Official data on the growth of the People’s Republic of China’s (PRC) GDP, released in January this year, indicated that the Chinese economy grew by 8.1% in 2021, which met the government’s growth target of “over 6%.” Despite this growth rate, some symptoms of PRC’s domestic economic problems are appearing.

SOURCE: FLICKR

Although the total GDP growth for 2021 reached 8.1%, it had dropped to just 4% in Q4 2021, which was the lowest rate since Q2 2020.[1] This took place when the Chinese economy was impacted by the COVID-19 pandemic the most. The structural problems of the Chinese economy are particularly noticeable in the real estate market, for instance, the Evergrande Group. This second largest (until recently) real estate developer in China sold properties for only CNY 700 million (USD 111 million) in the last two months of 2021, a 99% drop in comparison to the previous year.[2] In contrast, the entire 2021 brought the Group contracts totaling CNY 443 billion (USD 70.1 billion), which constitutes a 40% drop compared to 2020.[3] Moreover, the company was forced to demolish 39 buildings in Hainan Province, allegedly built with illegally obtained permits.[4] Evergrande’s assets may be taken over by state-owned companies as part of a restructuring by the government of Guangdong Province, where the developer is based.[5]

Evergrande is not the only company that is facing problems. Shimao Group, one of the largest businesses in China’s real estate market, has also put all its domestic real estate projects up for sale in an effort to divest its assets and thus increase funds.[6] Group’s stock price has fallen more than 20% over the past month, while Moody’s and S&P Global Ratings downgraded the company’s rating to B2 and B- respectively.[7] Other property developers, such as Kaisa and Fantasia, also have to deal with the effects of the real estate turmoil – increasing caution among banks and investors makes it harder for them to obtain funding.[8]

Evergrande’s collapse and the issues of other real estate companies could hurt both private owners and the whole financial system. Real estate and related industries account for as much as 30% of the country’s GDP.[9] In November, the US Federal Reserve warned that China’s real estate troubles could badly affect the global economy.[10] As Reuters reports, Beijing has taken steps to restore stability, including making it easier for state-backed developers to buy up distressed assets of indebted private companies.[11] Certainly, maintaining a relatively stable economic situation is one of the goals of the administration of Xi Jinping, who is set to extend his rule to a third term at the 20^th Congress of the Chinese Communist Party (CCP) this year.

[1] https://www.bloomberg.com/news/articles/2022-01-13/china-gdp-growth-to-slow-boosting-case-for-rate-cut

[2] https://www.bankier.pl/wiadomosc/Zalamanie-sprzedazy-Evergrande-Wladze-kaza-gigantowi-wyburzyc-budynki-w-prestizowej-lokalizacji-8253823.html

[3] https://www.bankier.pl/wiadomosc/Zalamanie-sprzedazy-Evergrande-Wladze-kaza-gigantowi-wyburzyc-budynki-w-prestizowej-lokalizacji-8253823.html

[4] https://edition.cnn.com/2022/01/04/investing/evergrande-stock-gain-resume-trading-intl-hnk/index.html

[5] https://www.reuters.com/business/shares-china-evergrande-jump-after-report-restructuring-plan-be-released-soon-2022-01-24/

[6] https://edition.cnn.com/2022/01/11/business/china-shimao-debt-downgrade-intl-hnk/index.html

[7] https://edition.cnn.com/2022/01/11/business/china-shimao-debt-downgrade-intl-hnk/index.html

[8] https://edition.cnn.com/2022/01/11/business/china-shimao-debt-downgrade-intl-hnk/index.html

[9] https://www.cnbc.com/2021/10/21/china-economy-property-sector-must-shrink-to-be-stable-says-prof.html

[10] https://edition.cnn.com/2022/01/04/investing/evergrande-stock-gain-resume-trading-intl-hnk/index.html

[11] https://www.reuters.com/markets/deals/cash-strapped-chinese-developer-shimao-sells-stake-asset-state-owned-partner-2022-01-25/

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