Beijing At Last Acts

As readers of this column know, Beijing needed to inject emergency liquidity into its financial markets more than a year ago when the giant property developer Evergrande first announced that it could not meet its obligations. Instead, the authorities engaged in more than a year of delay and finger pointing. Now the solons in the Forbidden City seem at last to have awakened to their economy’s needs. They have taken steps to provide that liquidity, 16 measures in fact that will reliquefy real estate developers. Had Beijing acted sooner, policy would have had an easier time righting the financial ship. Having wasted all this time, the rescue must now deal not only with the problems of developers but also with the damage done in the interim to individual wealth and confidence as well as the ill effects of China’s draconian Covid lockdowns as well.

The authorities aim with their latest measures to halt or at least slow the collapse of this critical sector of China’s economy, which, due to past enthusiastic emphasis by Beijing’s central planners, had grown to about 30 percent of the economy. Had Beijing made these or similar moves back in August 2021, when Evergrande first indicated that it was cash short, a special flow of liquidity might well have done all that was necessary. It would have allowed Evergrande to complete the housing units for which it had contracted and for which it had taken buyers’ money. It would have staved off the failures of other developers that in the past year have greatly compounded problems in the real estate sector. Now matters are more complex. Delays allowed problems to fester, destroying confidence, and accordingly deepening the sector’s and the economy’s problems.

Data makes painfully clear the damage done to this growing and important sector during the time since Beijing’s initial failure to act. China’s national Bureau of Statistics reports that investment in real estate development, after growing 7.3 percent in 2021, mostly earlier in the year before Evergrande announced, has fallen 8.8 percent so far this year. Sales of commercial floor space had declined 22.3 percent after growth of 7.3 percent in 2021, and revenues from the sale of commercial space has fallen 26.1 percent so far this year after growth of 11.8 percent in 2021. Home prices have dropped at the fastest rate in years, and residential property sales have declined for 15 straight months.

Today’s complexities lodge less with developers than with buyers. Real estate firms are delighted to find new resources to meet their obligations and relieve at least some of the burden of their bankruptcies. But now because of past inaction, the economy faces a general loss of confidence that at the very least has prompted buyers to shrink back for making a commitment to new home ownership.

The immediate effect emerged from the losses sustained by people on unfinished housing units. In China, unlike in the United States, people can pre-buy homes from developers like Evergrande. They can procure a mortgage on these pre-bought but unbuilt dwellings. When Evergrande and, after it, other developers failed, they also failed to finish many of these pre-bought units, leaving thousands of Chinese with a mortgage on a property they could not occupy. When it became apparent that Beijing was doing nothing, many of these people – desperate —refused to pay on their mortgages, an act that carried the developers’ problems into banks and other lenders. Thousands more saw what was happening and, not surprisingly, decided to avoid such risks. A drop in home process has reinforced the growing conviction that ownership is too risky. Now even though the new flow of liquidity will enable the developers to complete at least some of those unfinished units, buyers, once plentiful, are no longer so willing.

China’s Covid problems, though unrelated to the real estate mess, have nonetheless compounded these problems. The severe lockdowns and quarantines imposed by Beijing’s zero-Covid policies have fostered widespread concerns among Chinese about future income growth, either because they fear more lockdowns or because they are unsure about the economy’s prospects generally even after China emerges from Covid-linked oppressions. Such anxieties have been exacerbated by the remarkable slowdown in China’s growth. Whatever the specific cause of concerns, and it is likely a combination of these, they have depressed the kind of optimism that is a necessary part of anyone’s decision to buy a new house. Some who were thinking of trading up from their existing property have rethought that decision. Others who have saved what could serve as a down payment have developed a greater reluctance to put those funds at risk.

If the additional liquidity provided by Beijing’s 16 measures can overcome the reluctance of homebuyers and if Beijing can also temper the severity to its zero-Covid policies, there is a chance that matters can begin to recover. But for the time being these are big “ifs” especially because Beijing waited so long to act.