China's Housing Collapse is Still Getting Worse
Summary
TLDRThe Chinese property sector is in crisis, with housing starts down 60% and house prices falling for 12 months straight, affecting the economy significantly. Urbanization and a cultural emphasis on home ownership led to a speculative bubble, likened to a Ponzi scheme, which the 'three red lines' policy attempted to curb, causing a sector-wide funding crisis. The Evergrand Group's bankruptcy highlighted this issue, leading to reduced spending, business downturns, and a broader economic impact. Despite government measures to stimulate the market, investor confidence remains low, and the economy faces deflationary pressures. There are, however, signs of slight recovery with recent data indicating a return to slight inflation and increased consumer spending.
Takeaways
- 🏗️ China's property sector is in crisis, with housing starts falling by over 60% and house prices dropping for 12 consecutive months.
- 💰 Real estate is a significant part of Chinese citizens' wealth, with 90% of households owning homes and 70% of household wealth tied up in property.
- 📉 The decline in the property market has led to reduced spending by citizens, negatively impacting businesses and stock market performance.
- 🌐 Urbanization in China has driven demand for residential homes, which has been both a social goal and an investment product for Chinese families.
- 💡 The pre-sale model in China's property development resembles a Ponzi scheme, where new investors' funds are used to pay off previous investors and fund ongoing projects.
- 🚫 The 'Three Red Lines' policy by the CCP has restricted developers' ability to take on more debt, causing a sector-wide crisis in finding new funds.
- 📉 The Evergrande Group's bankruptcy has shaken investor confidence and led to a slowdown in China's real estate market.
- 📉 Chinese property investments have seen the most significant year-over-year decline on record, aside from the early days of the COVID pandemic.
- 📉 New and secondhand home prices have dropped sharply, with the steepest decline in secondhand housing prices since 2011.
- 🛑 The Chinese government has taken measures to assist the property sector, including allowing local governments to buy homes and cutting mortgage rates, but investor response has been weak.
- 🌟 There are some positive signs of slight inflation and increased consumer spending, as well as growth in exports, indicating potential for economic recovery.
Q & A
What is the current situation of China's property sector?
-China's property sector is in crisis, with housing starts falling by more than 60% compared to pre-pandemic levels and house prices experiencing a significant drop.
How does the decline in the property sector affect Chinese citizens?
-Since approximately 90% of Chinese households own their own homes and around 70% of household wealth is tied up in property, falling house prices directly impact their wealth and spending habits.
What is the Ponzi scheme-like aspect of China's property development?
-Developers sell pre-sale homes where buyers pay a deposit and start mortgages before construction is complete. The revenue from these pre-sales is often used to fund previous projects, creating a cycle similar to a Ponzi scheme.
What was the 'three red lines' rule introduced by the CCP and its impact?
-The 'three red lines' rule set financial thresholds for real estate developers to take on more debt, causing a sector-wide crisis as many developers were in breach, leading to difficulties in finding new funds and a slowdown in the real estate market.
How has the property crisis affected the broader Chinese economy?
-The property crisis has led to reduced spending by citizens, impacting businesses and causing a decline in stock prices, layoffs, and a negative spiral in the economy.
What measures has the Chinese government taken to address the property sector crisis?
-The government has allowed local authorities to buy homes for affordable housing, cut mortgage loan interest rates, and reduced down payment ratios for home buyers to stimulate demand.
What has been the response of investors to the stimulus measures taken by the Chinese government?
-Despite the stimulus measures, investors have not yet responded positively, as evidenced by the continued weak funding for developers and the shrinkage of financing for developers.
How has China's approach to economic stimulus during the pandemic differed from that of the US?
-While the US printed trillions of dollars in stimulus, China chose not to implement large-scale stimulus, leading to different economic outcomes, with the US experiencing inflation and China facing deflation.
What are some positive signs in the Chinese economy despite the ongoing challenges?
-There are signs of slight inflation and increased consumer spending, with retail sales beating expectations and exports growing, indicating some recovery potential.
What are the expectations for future economic measures by the Chinese government?
-Economists expect further interest rate reductions, relaxation of housing regulations, and possibly increased borrowing for infrastructure. However, there is a call for measures that put income directly into people's pockets to stimulate consumption.
Outlines
🏗️ China's Property Sector Crisis
The video script discusses the current crisis in China's property sector, which is significantly impacting the nation's economy. Housing starts have plummeted by over 60% compared to pre-pandemic levels, and house prices are rapidly declining with new home sales falling for 12 consecutive months. This is particularly concerning as approximately 90% of Chinese citizens own their homes, and around 70% of household wealth is tied up in real estate. The downturn in the property market has led to reduced consumer spending, negatively affecting businesses and stock market performance. The script also explains the role of urbanization and the pre-sale Ponzi-like scheme in exacerbating the crisis.
📉 Economic Impact and Government Intervention
This paragraph delves into the broader economic implications of China's property sector downturn. With citizens tightening their belts due to falling house prices and economic uncertainty, businesses are suffering from reduced profits, leading to stock price declines and potential layoffs. The government has attempted to intervene by allowing local authorities to purchase homes for affordable housing and by cutting interest rates and down payment ratios for home buyers. However, these measures have yet to stimulate a significant response from investors, and the property sector continues to struggle, affecting the overall economy as consumer spending and savings rates are impacted.
🛑 Signs of Recovery Amidst the Crisis
The final paragraph of the script presents a mixed outlook on China's economic situation. While there are positive signs such as a slight uptick in inflation and increased retail sales, the property sector remains a significant concern. Exports have shown growth, but the overall economy is not yet out of difficulty. The script criticizes the Chinese government for not doing enough to stimulate domestic demand and consumption, suggesting that more aggressive measures, such as putting income directly into people's pockets, are needed. It concludes by emphasizing the importance of China's role in the global economy and the hope for a reversal of the current economic trends.
Mindmap
Keywords
💡Property Sector
💡Urbanization
💡Wealth Tied Up in Real Estate
💡Ponzi Scheme
💡Three Red Lines
💡Evergrande Group
💡Deflation
💡Consumer Spending
💡CSI 300 Index
💡Infrastructure Financing
💡Stimulus Measures
Highlights
China's property sector is in crisis, affecting the entire economy.
Housing starts have fallen by over 60% compared to pre-pandemic levels.
New home sales have been declining for 12 consecutive months.
90% of Chinese households own their homes, tying a significant portion of their wealth to real estate.
Urbanization has led to a monumental rise in urban property development in China.
Approximately 70% of household wealth in China is tied up in property.
Chinese property development resembles a Ponzi scheme with pre-sale homes.
Pre-sale funding is often used to complete previous projects rather than the intended one.
The 'three red lines' rule by CCP has caused a crisis in finding new funds for property developers.
Evergrande's bankruptcy reflects the strain on the property development sector.
Chinese citizens are tightening their belts due to falling house prices and economic uncertainty.
CSI300 index shows businesses across China are performing poorly.
China's approach to the pandemic with no large-scale stimulus has led to deflation.
Chinese government actions to assist the property sector have been insufficient, according to critics.
There are signs of slight positive changes with retail sales and exports showing improvement.
Economists suggest that China needs measures to put income into people's pockets to stimulate consumption.
The Chinese economy's recovery will depend on the measures taken by the CCP to spur domestic demand.
Transcripts
if you've seen China in the news lately
you're probably familiar with photos
like these lots of construction
seemingly going on until you look closer
and you realized that there's actually
nobody working on these buildings this
is because China's property sector is
currently in a bit of a crisis and it's
having a really big flow and effect to
their entire economy just how bad is it
well according to the IMF housing starts
have fallen by more than 60% relative to
pre pandemic levels house prices are
falling fast with new home sales falling
for 12 straight months and this is bad
news for Chinese citizens as so much of
their wealth and savings are tied up in
real estate in America roughly 65% of
households own their own homes whereas
in China that percentage Rises to 90 90%
so with all this wealth tied up in real
estate and house prices falling pretty
sharply Chinese citizens are feeling the
pinch they've stop spending which means
that businesses generate less income and
as you can see by the csi300 index
businesses across the board are doing
really poorly so what's going on in
China right now and will their economy
turn around anytime soon well to get an
understanding of their economy now you
have to understand what's been happening
in China over the past few decades one
of the major Trends we've seen take
place is urbanization so since the mid
1990s those living rurally have really
been moving more and more to the cities
and this has spared a Monumental rise in
urban property development being able to
own your own home became a huge social
goal for people in China and that drove
huge demand for residential homes not
only to live in but also as investment
products in fact in China approximately
70% of household wealth is tied up in
property people will save for decades
and even team up with other families
just to put down a deposit on some
Chinese residential real estate and due
to this insatiable appetite for
residential property it didn't take long
before the developers started testing
the waters of just what was possible and
honestly it turned into a bit of a Ponzi
scheme we've all heard of the Ponzi
scheme right this is a scheme where you
promise investors a very handsome return
and as you find new investors you simply
use their money to pay the investors who
came before them then as people see the
returns being made in this scheme they
too sign up as investors and their
investment gives the investor before
them the very impressive payout that
they were expecting and the cycle
continues now these sort of schemes are
a disaster waiting to happen but
although being horribly illegal they do
actually work in a world where you can
always find new investors and this is
kind of how Chinese property development
Works especially when you talk about
pre-sale homes so in China developers
will sell a pre-sale round where buyers
will put down a deposit and start paying
back a mortgage before their home is
even built and you might say that's
insane but in China that's just how it
goes in fact in 2020 3 4.5% of
developers funding came from deposits
and pre-sales now the problem is revenue
collected from pre-sale rounds would not
actually be used to fund the Project's
development it would in fact be shoveled
up the chain and used alongside copious
amounts of borrowed money to fund the
completion of last year's development
then they draw up some new apartment
buildings and complete the pre-sale
round on those sign up the excited
buyers with a fat mortgage and then that
fresh money can be shoveled up the chain
again to help fund the comple of the
last wave of Apartments a Chinese
Economist was recently quoted saying
when the economy is good with the
continuous expansion most of the
properties can be delivered but when the
economy is not good it becomes a little
bit like a Ponzi scheme if there is no
follow-up funding they will not be able
to complete construction so just like a
Ponzi scheme it does actually work as
long as there's always fresh demand and
nothing gets in the way of these
projects being completed now here's the
problem that started to trigger this
whole property crisis in 2020 seeing
that the Chinese property developers
were getting way over lever the CCP
announced a new rule called the three
red lines and what this meant was that
for Chinese real estate developers to be
eligible to take on more debt they must
first show that their liabilities did
not exceed 70% of their assets their net
debt should not be greater than 100% of
equity and their cash reserves must be
at least 100% of short-term debt and
while this is all quite smart the
problem was that in 2021 almost half of
China's property developers were in
breach of at least one of the three red
lines causing a sector-wide crisis in
finding new funds as old debts came due
this caused a huge strain on the
property development space and it was
obviously very well documented in the
media through the eventual bankruptcy of
the evergrand group this debt crisis
shook invest to confidence and it led to
a significant slowdown in China's real
estate market with declining property
sales and prices but that's the real
problem because so much wealth of
Chinese citizens is tied up in property
remember roughly 70% send any slowdown
in this one sector can quickly lead to a
much broader economic issue alongside
other issues like the sluggish economy
coming out of Co having uncertainty in
the property sector and falling house
prices leads the citizenry to really
tighten the belt and reduced spending
has a flowing effect into businesses
businesses don't generate as much profit
stock prices fall employees may need to
be laid off in cost cutting efforts
which lowers the spending appetite even
more and you have a bit of a negative
spiral and to an extent that's what
we've seen in China over the past year
so with that said what is going on in
China right now how bad are their
economic Wows and are there any signs of
life well starting with property there's
no doubt that things aren't really that
great Bloomberg recently noted that new
home prices fell for the 12th straight
month on a month-over-month basis and
the month-over-month measure was the
worst in almost a decade we've now seen
year-over-year declines in house prices
in 67 out of the 70 major Chinese cities
the most since 2015 and the data isn't
any better for secondhand housing I.E
houses being sold that aren't brand new
prices have now dropped 7.5% year year
with a 1% fall in May alone this is the
sharpest decline since at least 2011
when China started using this current
data collection method and what's worse
is that from January through May
year-over-year property Investments fill
by the most on record other than during
the earliest days of the co pandemic
falling 10.1% year-over-year now there
has been some action taken from the
Chinese government recently to try and
assist the residential property sector
Reuters notes that China will now allow
local government authorities to buy some
homes at reasonable prices to provide
affordable housing and that they will
cut interest rates of mortgage loans and
down payment ratios for home buyers to
try and boost this lackluster property
demand but it still seems investors
aren't yet responding to those stimulus
measures Bloomberg also notes that
funding for developers has stayed weak
since the government Drew up a white
list of property firms that are eligible
for loans late last year a broad gauge
of financing for developers including
loans bonds and proceeds from home sales
continued to shrink heavily down
24.3% from a year earlier separate data
showed on Monday so things still aren't
looking great for the Chinese property
sector and as I was mentioning before
this does have a flowing effect into the
broader Chinese economy because house
prices are falling the average Chinese
citizen is seeing their wealth fall
before their eyes and this coupled with
the sluggish response to their economy
after the co lockdowns ultimately has
people tightening the belt which isn't
good for the economy we have to remember
that while the US printed trillions of
dollars of stimulus during the tough
lockdown periods of the pandemic China
actually chose not to implement large
scale stimulus and as you might expect
it caused a totally different outcome to
what has been seen in the US because the
US printed a lot of money and gifted it
out it inflated spending Behavior right
the savings rate skyrocketed meaning the
average citizen had more in their pocket
to spend and as you can see consumer
spending Rose steeply coming out of the
pandemic and has continued to rise ever
since now that's great to keep the
economy humming but it also caused a lot
of inflation at worse 99.1% and that's
what we've been dealing with now in
China they have not been giving out WS
of cash and instead they've seen
deflation the price of goods and
services has been shrinking and that's
because of citizens tightening the belt
we can see this occurring in the data
too a recent survey of 20,000 households
done by The People's Bank of China found
that in q1 of this year more people were
looking to add money to their savings
and there was a lower focus on
investment and consumption and all this
has had a tremendous impact on share
prices of Chinese companies as I noted
at the top of the video the csi300 index
has been performing very poorly since
mid 2021 if you look at their biggest
stocks in alib barabar or tensent jd.com
buo and so on all of these companies
have seen their share prices crunched
particularly those that are directly
related to consumer spending like
Alibaba and JD but is there any light at
the end of the tunnel is there any sign
that there could be a turnaround anytime
soon while there is a very long way to
go there is actually yes there are some
bits of data that are improving at the
moment the deflation we saw at the start
of this year has ticked back up into
very slight inflation which is good to
see and there are hints that the
consumer is starting to spend again
China's retail sales beat expectations
in May climbing 3.7% compared with the
year ago beating the expectations of a
3% rise from Aida's pole of Economist
the country's National Bureau of
Statistics elaborated that total retail
sales of consumer goods reached 3.92
trillion Yuan or around $540 billion US
with sales in urban areas up 3.7% year-
on-ear and sales in rural areas climbing
by
4.1% and while not related to local
consumer spending another important
bright spot for the Chinese economy in
this latest batch of data was exports
that grew 7.6% year-on-year in May in US
dollar terms beating the reuter forecast
for a 6% increase so there are some
positive signs but the Chinese economy
is far from out of the woods and a lot
of this will come down to measures the
CCP take to spur on the economy they
have taken some action as I said
allowing local governments to buy
property as well as lowering rates and a
few other bits and pieces here and there
but economists have been critical that
the CCP has not done enough to spur on
demand in their own economy they keep
talking about the fact that they want to
strengthen domestic demand and quote
strengthen consumption but time after
time they fail to take the measures that
actually will do that we are certainly
expecting interest rates to come down
people are expecting relaxation of
regulations in the Housing Industry
which is baguer and facing a long period
of years ahead of shrinkage and May well
be some further borrowing to finance
infrastructure for example what we
really want to see though is we want to
see government measures to put income
into people's pockets so that they can
go out and consume and that afraid is
something that may not actually be seen
and I for one hope that China is able to
reverse these economic Trends as odd as
it may sound with all the China bashing
that happens in the media China
obviously plays a major role in the
global economy they are a huge buyer of
stuff that our countries sell they're
also a huge producer of stuff that we
need so while it might sound a little
bit odd I'm definitely in the Charlie
manga camp that we shouldn't be looking
at fighting China the world would be a
much better place if we all focus on
getting along with them but with that
said guys that is an update on the
Chinese economic situation that is
stemming from its property crisis I hope
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the next video
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