How China’s US$8-trillion real estate debt could impact us all
China has a culture of real estate investment. The real estate sector makes up 29 per cent of the country’s gross domestic product (GDP) or approximately US$4.2 trillion. Every year the country begins constructing 15-million new homes — five times as many as the United States and Europe combined. China’s housing market, valued at US$52 trillion in 2019, is two times the size of the United States residential market (Li Gan, professor of economics, Texas A&M University,October 2021).
Rapid urbanisation and incentives by the Chinese Government — which receives large revenues from leasing lands to developers — are the driving forces of their housing stock market. In 2020, 61 per cent of the Chinese population lived in urban cities; up from 35.8 per cent in the late 1990s.
Recently, China has been facing a dilemma in what some argue as a ‘flaw’ in their urbanisation metrics seeing that approximately 21 per cent (one in five) or 65 million homes in urban China were vacant in 2017 (PricewaterhouseCoopers, September 2021). With the average Jamaican household size being 3.1 people, this would be enough homes to house the Jamaican population 67 times. However, homes being empty do not indicate that they were not sold, but rather they are unoccupied by the investors and buyers who bought them as investments. Some 66 per cent of Chinese households, versus 24 per cent of those in the US, invest their money in properties over stocks and other investments schemes (JPMorgan Asset Management: Guide to China, July 31, 2021).
After the lockdowns in China thousands of residents feared a depreciation in the yuan as a result of the global economic shutdown and rushed to invest their money in properties. In the last 12 months, approximately US$1.4 trillion was invested in Chinese housing. At the peak of the US property boom in the 2000s, US$900 billion a year was being invested in residential real estate.
Enter Evergrande, China’s second-largest property developer, with more than 1,300 developments spread across 280 cities in China, collectively housing more than 12 million people. Today, Evergrande has the equivalent of US$300 billion of debt, making it the most indebted company now in the world, with 1.6 million undelivered housing units and unfulfilled bond payments to investors.
In China their market share is very small, but it would appear that the company’s bank exposure is far-reaching. “A leaked 2020 document, written off as a fabrication by Evergrande, but taken seriously by analysts, showed liabilities extending to more than 128 banks and over 121 non-banking institutions.” ( Reuters, October 2021)
Having missed interest payments to bondholders in late September financial experts argue that Evergrande’s debt problems could affect other property developers in China and create a new wave of defaults. As seen last month with the Chinese property developer Fantasia, who missed a US$206-million bond repayment deadline. Add to this list are developers Modern Land (China) Co, which delayed a US$250-million bond; China Properties Group Ltd, who defaulted on US$226 million in three-year notes that matured in October; Xinyuan Real Estate Co, another cash-strapped developer who did a distress exchange of more than US$200 million in dollar bonds that were scheduled to mature also last month. Developers are now deserting debt payments to preserve cash and give priority to paying their suppliers and creditors in mainland China as their sales have contracted by 20 per cent to 30 per cent ( Wall Street Journal, October 2021).
In my nearly 15 years in elected politics and public governance I have witnessed first-hand the shifting of some fundamental practices we once held as sacrosanct. There was a time when Governments worked towards balanced budgets or at the very least low debt-to-GDP ratios, where deficit spending led to high interest rates, where the price of gold increased directly with the US Government deficit spending, where countries invested in the US dollar because of their fiscal conservatism, and where a bank was a place that customers deposited or wired cash to a physical location. Now it is difficult to predict a natural order of things, especially with the development of cryptocurrency. However, one thing is for certain, in this big globally interconnected world, in the end economics will always trump politics. If the people cannot afford the houses built and banks cannot get their loans repaid, interest rates will rise, and there will be job losses.
This combination of events is normally followed by a recession. Because some Chinese companies and their balance sheets are not publicly available like those in the US or Europe it is impossible to gauge the full impact of these events. However, the manifestations have an uncanny resemblance to the US housing crisis which brought on the worldwide recession of 2008. The resulting real asset bubble China is now facing, many economists say, now casts a shadow to the one in the US.
Real estate developers currently dominate China’s international high-yield bond market, making up about 80 per cent of its total $197 billion of debt outstanding. Simply put, Chinese real estate companies are that country’s largest borrowers in the international financial markets (Goldman Sachs 2021). However, unlike the US Government that bailed out their individual banks and car manufacturing industry, the Chinese Government has not taken that direct approach to the Evergrande developer. It has, on the other hand, negotiated with their large banks to ease credit for home buyers and pumped US$123 billion into their financial system from their central bank.
What are the implications for Jamaica?
The answer lies in the actions of the Government of China and what it will do to ensure that the problem is contained and does not snowball and escalate. China is the manufacturing capital of the world and, with the country heavily invested in real estate, any downturn will negatively affect their own demand for building materials and machinery. Subsequently, with reduced volumes in production, large building material manufacturers will respond with increased prices for their goods. To complicate matters more, China has been experiencing energy lockdowns causing their manufacturers to already produce less.
Therefore, one could expect construction costs in Jamaica to increase as most of the tiles, kitchen cabinetry, bathroom furnishings, lighting fixtures, air-conditioning units, and electrical fittings originate from China for many of the new residential and commercial high-rise construction developments taking place on the island. Furthermore, a large enough construction downturn in China could lead to more Chinese developers and contractors seeking other overseas markets for their operations. Chinese contractors already control the majority of the high-rise buildings under construction in Jamaica.
On the finance side, lending institutions may be more cautious and inclined to include a higher risk premium for large projects in emerging markets such as ours.
I will never forget sitting in Parliament and hearing former Minister of Finance Audley Shaw saying that the 2008 global recession would not affect Jamaica. It certainly did, and in a major way too. Today, the impact of global financial events takes a much shorter time for their ripples to create massive waves. For too long Jamaica has been operating within its own bubble, thinking things will get back to old ‘normal’. There is no normal to get back to. The world is moving rapidly at pace away from us.
We need a fundamental mindset shift to commence a process of strategic global repositioning based on a foresighting of global opportunities. This is not a one-time action, but an ongoing process of continuous innovation that fosters our agility in recalibrating and improving production and services so as to secure and sustain a competitive advantage for Jamaicans given the changing global, financial and technological developments.
Let China be a lesson to us all.
Lisa Hanna is Member of Parliament for St Ann South Eastern, People’s National Party spokesperson on foreign affairs and foreign trade, and aformer Cabinet member.