Real estate crisis in China can inflict bigger economic blow: Report

The real estate slump in China has sucked in both banks and provincial governments, threatening a bigger impact on the world's second-largest economy, according to media report.

According to Nikkei Asia, defaults have soared over the past 12 months after property developers' debt-fueled growth model lurched into reverse. Around 99 defaults on domestic debt occurred in the year including delayed payments, according to Shanghai-based Wind Information.

It is to be noted that China's factory-gate inflation in July reached the lowest since February last year, according to the National Bureau of Statistics. The country's producer price index, which gauges factory-gate prices, increased 4.2 per cent year-on-year in July, following a 6.1 per cent rise from the previous month, China Daily reported citing NBS.

Earlier, S & P Global Ratings warned that around 20 per cent of Chinese developers it rates are at risk of insolvency. Chinese government triggered this reversal by imposing tougher restrictions in 2021 on mortgages and developers' access to financing.

The complete lockdown in major cities amid China's zero-COVID policy has put the country's economy under strain with increasing inflation and disrupted global supply chains.

Though China refuses to acknowledge it, the rigid stamping out of COVID-19 from the country is beginning to affect big companies and industries which are suspending operations in Shanghai and other cities, reported The Hong Kong Post.

Meanwhile, new housing sales shrank 27 per cent on the year in volume in the January-June half. July sales fell 13 per cent from June and 27 per cent from a year earlier across 100 major Chinese cities, according to real estate research company China Index Academy, cited by Nikkie Asia.

Banks have begun to feel the heat. Lending to the real estate sector makes up 26 per cent of China's total outstanding loans, compared with around 21 per cent to 22 per cent in Japan at the height of the property bubble there. The percentage of nonperforming loans held by China's big four state-owned banks increased by over 1 percentage point in 2021 to 3.8per cent.

Several housing developers have halted ongoing condominium construction projects as they are unable to secure cash. Yan Yuejin at Shanghai-based E-house China R & D Institute estimated that around 4 per cent of new builds sold in the four years through June 2022 had problems, Nikkie Asia reported.

While local governments are hardly on solid financial footing themselves.

As tax breaks eat into their revenue, local authorities have come to rely heavily on income from selling usage rights for state-owned land to developers. Land sales revenue exceeded tax income in 2020 for the first time in data going back to 2010.

But cash-strapped developers cannot afford land for new residential properties. Local governments' land income dropped 31 per cnet on the year in the first half of 2022, and is expected to decline on a full-year basis for the first time in seven years. The squeeze on the industry has also hit income from property-related taxes.

S & P Global estimates that as many as 30 per cent of local governments could be in dire enough financial straits at the end of this year to require corrective action such as spending cuts.

Real estate has been a key driver of the Chinese economy in the last two decades.

According to Harvard University professor Kenneth Rogoff, real estate and related activities now account for around 29 per cent of gross domestic product, up from less than 10 per cent at the end of 1990.