China’s Growth Model Strained: Navigating Hurdles as Stimulus Measures Encounter Challenges

China’s property market, a once-vibrant driver of economic growth, is now causing concern as it languishes in a state of depression.

Strained local government finances and a weakened yuan have left authorities wary of deploying the massive stimulus measures that were employed after the global financial crisis.

The repercussions of this slump are visible on multiple fronts. For instance, homebuyers near Shanghai’s Lujiazui financial district recently made headlines by refusing to pay their mortgages for unfinished apartments.

This defiance, often witnessed in smaller cities with lower home prices, has now extended to upscale projects where units fetch over 15 million Chinese yuan ($2.1 million) each.

This unsettling incident highlights the grim realities of China’s real estate sector. July witnessed home prices declining in 49 out of 70 major cities, while real estate sales for the January-July period dropped 6.5% year-on-year by area sold.

The sales for July plummeted by 24% compared to the previous year and a staggering 46% from July 2021, though comparisons are complicated by pandemic-induced disruptions and other factors.

Major players in the real estate development arena, such as Country Garden Holdings and Sino-Ocean Group Holding, have encountered cash shortages, echoing the struggles of the heavily indebted China Evergrande Group.

Prospective homebuyers have become apprehensive about purchasing properties under construction, fearing that developers might fail to deliver on schedule.

The extensive inventory of unsold homes, which swelled by 17.9% to 645.6 million square meters in July compared to the previous year, has eroded developers’ appetite for new construction. 

The real estate downturn has also significantly impacted local governments that rely on land-use rights sales for substantial revenue, equivalent to taxes.

With limited finances, local authorities are struggling to sustain local government financing vehicles that fund infrastructure projects.

Default concerns are rising around these financing vehicles controlled by regions like Yunnan and Guizhou provinces, as well as the city of Tianjin.

These local government financing vehicle debts are excluded from official statistics. However, the International Monetary Fund estimates that they are equivalent to 53% of China’s gross domestic product, significantly higher than the 24% national government debt and 32% local government debt.

China’s population shift from rural to urban areas has slowed, and the country’s population is in decline.

A mere 6% of surveyed investors anticipate successful government efforts to revive the property market, while 51% predict only limited efficacy.

No longer able to rely on surging real estate prices to bolster economic growth, China is vulnerable to falling into a prolonged stagnation akin to Japan’s.

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Yuan’s Softening Value and Bond Yields: China’s Financial Crossroads

 

Financial markets have already absorbed these concerns, with the benchmark 10-year yield on Chinese government debt hovering around 2.5%, approaching the 2.352% level from June 2002, the lowest on record.

Anticipated disparities between US and Chinese interest rates have softened the yuan’s value. 

The Chinese currency reached 7.2989 yuan to the dollar during Shanghai trading, inching close to its lowest point in over 15 years, 7.328 reached in November 2022.

The potential widening spread has prompted analysts to predict that the yuan could breach this level.

The market yield for dollar-denominated bonds by Country Garden surged to 3,000% as concerns grew about a possible default.

In contrast to the massive 4 trillion yuan stimulus package enacted after the 2008 global financial crisis, China now faces dilemmas due to the weakened yuan.

Extensive monetary easing could risk capital flight similar to 2015. Similarly, substantial fiscal spending might exacerbate the debt issues plaguing local government financing vehicles, adding complexity to China’s ongoing economic challenges.

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Source: NIKKEI Asia