The words "Tariffs" and "Trump" have dominated headlines recently, leaving investors with mixed views on the market. With 10% tariffs on Chinese imports and talks of an imminent trade war, China faces pressing domestic issues alongside its murky geopolitical stance.
A crippled real estate industry has hurt consumer spending and confidence, and the economy struggles despite numerous stimulus packages from Xi Jinping. GDP growth picked up to 5.4% at the end of 2024, but analysts question its sustainability. Evergrande and Country Garden, two prominent real estate developers, have been unable to meet their debt obligations since 2021. Now, Vanke, another key developer, is also struggling with debt. Recently, Moody's downgraded Vanke’s credit rating to B3, deepening its junk bond status.
How did we reach this state?
Urban migration has made the real estate industry crucial to Chinese consumers, driving housing demand. Moreover, from a cultural standpoint, houses continue to symbolise prosperity and wealth, augmenting their value. Home purchases were financed using mortgages, savings, and income, and during the period 2015 to 2021, the value of personal housing loans increased by approximately 170%. Developers also took advantage of easy credit, increasing their leverage. This was manageable provided house prices continued to rise. However, the government imposed the “three red lines” policy to control debt growth, requiring developers to meet liquidity ratios. This regulation made it harder for developers to repay debts, causing house prices to drop. Consequently, consumers faced declining net worth and mortgage repayments. As of September 2024, new home prices are down 6% and second homes down 13% from 2021 levels.
Value of personal housing loans in China, Statista
How should China navigate this crisis and revive its macroeconomic climate?
Chinese authorities plan short-term actions to mitigate the impact, such as funding to reduce Vanke’s $6.84 billion debt burden. The government-controlled banking sector plans a syndicated loan of almost $11.2 billion from twelve major banks. Long-term growth will depend on well-directed stimulus spending, but the government must assess public debt levels first.
China’s government debt as a % of GDP, CEIC data
While debt has been rising, some argue it is not as problematic since much of it is tied to local governments rather than the central government. This could allow for future expenditure and stimulus packages. Local governments borrowed heavily to support developers like Evergrande, Country Garden, and Vanke, so their defaults have also impacted local governments. China must support and monitor local governments closely to stabilise debt levels.
As China recovers from the housing crisis, its ability to manage domestic and external economic influences will determine whether it can sustain GDP and domestic consumption growth. Chinese trade is under pressure as Trump takes control of tariff policies and trade relations, causing further disruption.
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