After a few months of relative tranquility, the real estate crisis in China is again gaining strength and revealing that the entire real estate system based on financial speculation and not on real needs is collapsing. It’s putting China’s productive system as a whole at risk.
Recently, a group of buyers of homes under construction in China, whose properties have not been completed due to the precarious economic situation of some construction companies, stopped paying monthly mortgage installments, which exposes and deepens even more the crisis that the real estate sector is going through.
Fitch Ratings, the international credit rating agency, published a report a few months ago. It stated that if the trend in the fall of real estate sales in China continues, at least one-third of the development companies rated by them will suffer an inevitable financial deficit in the coming months.
Fitch Ratings’ warning is now being fulfilled. Due to their fiscal deficits and lack of liquidity, construction companies are forced to delay and even suspend works in progress to the detriment of their clients, who further aggravate the delicate situation by stopping the payment of their installments.
Origin of the conflict
The financial and real estate markets under the Chinese communist regime have been on shaky ground since the crisis of the Chinese real estate giant Evergrande became evident during the last few months. The immediate result is that the entire sector has become a massive bubble about to burst.
This phenomenon called a “financial bubble” arises when the market reflects the explosive increase in the price of real estate due to high demand and low supply. Faced with this situation, financial speculators inject more money into the market, causing a further increase in demand.
Then, peak demand begins to fall at a certain point while supply continues to increase. When that happens, the bubble bursts—precisely what is happening today in China.
In short, the bubble in the communist regime’s real estate market has led to a steady rise in property prices. Construction companies took advantage of the situation and rushed to build more houses and buildings without noticing that demand was falling at an outrageous rate.
The result was that today construction companies have millions of unsold or half-built unfinished properties and no liquidity to continue. At the same time, those clients who trusted and started to pay for their houses find their property half-built, and the construction companies cannot give them answers because they do not have enough funds to continue.
Evergrande’s crisis is proof of the generalized crisis
Evergrande, the world’s most indebted real estate developer, is currently struggling to repay more than $300 billion in liabilities, which include almost $20 billion in international market bonds that rating firms considered a cross-default last December after the first maturities.
In the face of repeated defaults, the Chinese communist regime has intervened on several occasions to prevent a disorderly collapse of the business group to avoid the consequences affecting the rest of the economy as little as possible, reported CNN.
Although Evergrande is on the front pages of all the media for being the largest real estate development company, the reality shows that all the firms in China dedicated to this area present a similar or worse situation. This indicates that the crisis is not exclusively due to personal factors but to serious structural issues of the economy led by the Chinese communist regime.
Thousands of savers are unable to withdraw savings from banks
Protests are not common under the Chinese communist regime. The truth is that in the last few days, thousands of small savers decided to complain about not being able to withdraw their savings from banks located in rural areas of Henan province.
Several banks blocked the withdrawal of funds, arguing that they were supposedly reforming their systems. The problem is that these blockades have continued since April, which is why thousands of customers decided to face the dangerous consequences of a protest in China.
The reality is that the Chinese banking sector, especially the firms distributed in rural areas such as Henan, was hard hit by the measures implemented by the regime to contain the real estate bubble and the growing indebtedness of the sector. The regime established financial restrictions that had repercussions on all the country’s economic activity.
In this context, thousands of savers gathered in the city of Zhengzhou, the capital of Henan, where the police and unknown plainclothes thugs fiercely repressed them.
Videos of the protest circulated on social networks; unfortunately, some have already been censored. Nevertheless, the demonstrators claimed on their posters and chanted their opposition to the regime. They had already wanted to gather weeks ago, but the local authorities did not grant them the necessary health pass to carry out this outdoor activity.
Role of the Chinese regime in the crisis
As in everything in China, the regime actively participates and ultimately determines the course of how, when, and what should be done in all economic activities.
The real estate market is no exception; it was the business chosen by the regime as the engine of economic growth during the last decades.
Real estate and related sectors are key drivers of the Chinese economy, accounting for more than 30% of the total GDP. The proportion of economic output related to construction and associated activities is much higher than in other major economies, notes leading economist Mark Williams.
While it is undeniable that this activity, primarily encouraged by the regime, has been able to activate the economy significantly and was the mainstay of steady growth. However, critics have consistently warned that this engine was not genuinely working and was simply creating a real time-bomb due to the vast debt being generated by developers.
However, the Chinese communist regime turned a deaf ear to experts’ recommendations and continued along the same path. Today the results are beginning to show, and the danger of a total financial collapse is imminent, which could affect the Chinese economy and the entire world.