On Dec. 22, Nomura Securities released a report stating that China’s real estate industry is still the key to economic growth recovery. However, the worst period for the overall economy of China, especially the real estate industry, has not yet arrived.
The report pointed out that the challenges mainly come from three aspects:
- China’s property developing Industry may need to pay a total of $172 billion in wages to migrant workers and construction workers before the Chinese New Year (Jan. 31, 2022);
- Local authorities have restricted the use of pre-sale funds held by developers in bank accounts;
- The maturity of foreign bonds of real estate companies in the first and second quarters of 2022 will almost double that of the fourth quarter of this year.
Real estate developers focusing on small and medium-sized cities will face particular difficulties as their new home sales have halved compared to a year ago.
Although the Chinese Communist Party (CCP) seems to make an effort to ease the tension in the developer’s capital chain by decreasing the reserve requirement ratio a few times to keep it low. In reality, the credit crunch situation remains at the lower level because the monetary policy from the CCP is not proving to be effective at the moment.
Another valuable report from Standard & Poor’s Global Rating (S&P) states that the Chinese real estate industry as a whole has a recovering capability. However, it is not very promising.
The total liabilities of the entire Chinese real estate industry are about $3.7 trillion, and the receivable cash inflow of Industry as a whole through annual sales is approximately $1.3 trillion.
Furthermore, Private housing companies are concerned about their sustainability.
In extreme cases, about 50% of the selected companies in the report are unable to cope and still cannot repay debts after liquidating their inventories.
It is estimated that about 30% of real estate companies can cope with short-term debt repayment pressure.
S&P considers that real estate developers may not finish their projects in time under the adverse effects of declining sales, narrowing profit margins, and declining capital turnover efficiency.
In addition, in the first half of 2022, the Industry faces a peak in China’s domestic bond maturity. As a result, the overall liquidity pressure is relatively high, which will also affect the overall recovery of the real estate industry.
Kenneth Rogoff, Professor of Economics at Harvard, wrote in his column in September, “… the footprint of China’s real estate sector has become so large—with an impact of real estate production and property services on GDP of 29%—that absorbing a significant housing slowdown would significantly impact overall growth, even cause a financial crisis.”