China’s property crisis is reaching a point where there’s no turning back. For the past 12 months, the country’s monthly home prices have kept falling. Developers have defaulted one after another, leaving countless projects unfinished. Homebuyers are now protesting and refusing to pay their mortgage, which is deemed a danger to social stability in the eyes of the Chinese Communist Party (CCP). To save the real estate market, the CCP stepped in with waves of stimulus support for developers and homebuyers.

Earlier this month, Bloomberg reported that the People’s Bank of China and the China Banking and Insurance Regulatory Commission told six state-owned banks to provide over $84 billion (600 billion yuan) in real estate funding. In addition, the central bank has twice lowered the interest rate to support the troubled sector.

In August, Chinese authorities reportedly planned to provide property developers with loans worth $29 billion (200 billion yuan) to ease their troubles. 

Local authorities have also taken measures to shore up the property market, including reducing down payments and mortgage rates. In addition, Chinese developers participate in this rescue campaign as they offer gifts to homebuyers to boost housing sales.

Some developers are so eager to attract consumers that they give away pigs as a gift for each house purchase. Or, in another case, buyers will get job offers.

In a more desperate move reported by Caixin earlier this month, some property developers in the central Chinese city of Zhengzhou pretend to restart construction on stalled projects because they do not have enough funds. A source told the news outlet, “The developers of several projects even hired a few workers to go to the construction sites and pretend to restart work just to get past government inspections.”

Yet, the market shows no sign of recovery. In the past, China’s peak sales season was in September, also known as the “Golden Nine and Silver Ten.” This year, data from China Index showed that September home prices in 100 cities reduced by 0.02% month-on-month. In addition, the average sales of the top 100 Chinese housing firms from January to September plummeted 45.1% from a year ago.

So how did the crisis get to this point? Why didn’t the CCP’s efforts pay off? One factor that contributes to this situation is, first and foremost, the “zero-COVID” policy. With businesses forced to close, people confined to homes, no economic activities allowed, and the increasing unemployment rate, the country’s economic development situation halted. 

Rolling lockdowns have triggered a deadly chain reaction that leads to weakened consumption demand and lower consumer confidence. Moreover, this happened when Chinese people still had to pay their mortgages, while developers lacked funds and revenues to continue their projects. In a July interview, Bloomberg journalist Lulu Chen expressed her negative view over this issue with SpectatorTV. 

However, Bloomberg’s Stephen Engle said on October 10 that the CCP had not shown any intention of giving up the draconian policy so far, instead increasing restrictions since the 20th National Congress is approaching.

So, the COVID restrictions can be regarded as an objective factor that would neutralize the CCP’s effort to keep the market from freefall. However, even if the lockdown is ignored, the Chinese regime’s stimulus package is unlikely to have any effect in the short and long term. Why? Because its policies contradict those of local authorities in many aspects, especially when Chinese developers are facing dilemmas in finding resources to continue the projects.

On a broader scale, China’s property downturn originates from a more systemic problem. As mentioned by Bloomberg’s Lulu Chen, Xi Jinping’s motto is “houses are for living in, not for speculation.” 

This policy doesn’t work in a circumstance where 80% of Chinese household wealth is built around their homes. At the same time, developers rely on pre-sales revenue to invest in their following projects, and local authorities rely on land sales as their primary source of income. 

The “high debt, high leverage, high turnover” development mode of property developers have been there since day one. This contradiction between the central and local authorities reflects clearly in this real estate crisis. As many cities try to revive demand and restore confidence, their actions simultaneously go against Xi Jinping’s motto. 

The Economist cited a case in August when a local CCP chief in Hunan province was seen encouraging people, “Did you buy a third one? Then buy a fourth.”

Moreover, according to Carnegie China’s Michael Pettis, the CCP’s measures revolve around liquidity concerns. He wrote, “The regulators, in other words, are addressing what is basically an insolvency problem by extending or insuring liabilities as if it were a liquidity problem.” By doing so, the CCP would be able to prevent or limit financial contagion. 

However, he argued that the regime failed to address more fundamental problems, namely, “Liabilities not backed with debt-servicing capacity, ongoing distortions in fiscal and monetary policy, self-reinforcing economic ripple effects,” and “overly ambitious GDP growth goals.”

But the problem doesn’t stop there. According to Chinese financial analyst Lei, the property crisis will likely bring more risks to the CCP’s table. 

On top of that, the Chinese regime is under tremendous pressure from angry Chinese residents. Lei predicted that if the wave of mortgage boycotts gets more severe on a large scale, the Chinese banks and the regime will become restless. Because unlike protesters in the Henan banks’ case, these homeowners will have to stop paying their mortgage without “any confrontation to make a statement.” 

Even if the banks threaten to lower their credit scores, it’s not likely to concern them since there’s no longer trust in either developer, banks, or the regime.

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