China's Housing Collapse is Still Getting Worse

Summary

The 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

00:00

🏗️ 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.

05:01

📉 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.

10:02

🛑 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.

Keywords

💡Property Sector

The property sector refers to the segment of the economy that involves the buying, selling, renting, and development of land or real estate. In the video's context, it highlights the current crisis in China's property sector, which is significantly affecting the country's economy. The script mentions the decline in housing starts and new home sales, indicating a downturn in this sector.

💡Urbanization

Urbanization is the process of migration from rural to urban areas, leading to a significant increase in the urban population. The video discusses how urbanization in China since the mid-1990s has driven a monumental rise in urban property development, making home ownership a significant social goal and a major driver of the economy.

💡Wealth Tied Up in Real Estate

This concept refers to the situation where a large portion of a household's assets is invested in real estate. The script points out that approximately 70% of household wealth in China is tied up in property, making the health of the property sector crucial for the financial well-being of the citizens.

💡Ponzi Scheme

A Ponzi scheme is a fraudulent investing scam promising high rates of return, with earlier investors paid off with the capital from new investors. The video uses this term to describe the pre-sale model of property development in China, where new investors' funds are used to pay off previous investors, creating a cycle that is unsustainable without continuous demand.

💡Three Red Lines

The 'Three Red Lines' is a policy introduced by the Chinese government to regulate real estate developers' debt levels. The policy sets thresholds for debt-to-asset ratios, net debt-to-equity ratios, and cash-to-short-term debt ratios. The video explains that this policy has caused 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.

💡Evergrande Group

Evergrande Group is a Chinese real estate developer that filed for bankruptcy, which was mentioned in the video as an example of the debt crisis in the property sector. Its bankruptcy shook investor confidence and contributed to the overall slowdown in China's real estate market.

💡Deflation

Deflation is a decrease in the general price level of goods and services, often associated with an increase in the value of money. The video discusses how China has experienced deflation due to citizens tightening their belts and reducing spending, which contrasts with the inflation seen in the US after large-scale stimulus measures.

💡Consumer Spending

Consumer spending refers to the money spent by households on goods and services. The script notes that reduced consumer spending in China due to the property sector's downturn and economic uncertainty has had a ripple effect on businesses and the stock market.

💡CSI 300 Index

The CSI 300 Index is a stock market index of the 300 highest market capitalization stocks in China, excluding those in the financial sector. The video uses this index to illustrate the poor performance of businesses across the board, reflecting the broader economic challenges in China.

💡Infrastructure Financing

Infrastructure financing involves funding projects that create public infrastructure such as roads, bridges, and buildings. The video suggests that further borrowing to finance infrastructure could be one of the measures China might take to stimulate its economy.

💡Stimulus Measures

Stimulus measures are economic policies enacted to stimulate economic activity during a downturn. The script mentions that China has taken some action, such as allowing local governments to buy homes and cutting interest rates, to try to boost the property market and stimulate the economy.

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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