Country Garden sounds so innocuous, but so did Freddie Mac and Fanny Mae, until those sweet sounding names became shorthand for global financial disaster.
But the property crisis in China, if it is not contained, is likely to make the economic destruction created in 2008 look like a mild blip in the markets.
On September 27 the Chinese authorities placed Evergrande’s rags to riches chairman Xu Jia-yin, into “police control”, essentially house arrest. This move to detain the woodcutter’s son from Hunan province may well spell the death knell for Evergrande, China’s second largest property company. It has thousands of developments across China and over $300bn in unpaid debts.
Hopes that Jia-Yin, who recently fire sold his $300m house in London, could restructure those debts with his creditors have been dashed.
But China’s property woes are not single spies but battalions, and now Country Garden is in danger of being overrun. The visceral linkage between property and banking in China is the next thread to fray. As of June this year Chinese property developers had 5.3 trillion yuan, about $726 billion, in domestic bank loans. This amount to approximately 6 per cent of Chinese banks’ books.
Country Garden’s teetering, having failed to pay its own interest payments this month, combined with the Evergrande’s default, means that much of that debt will need to be written off. And this when those banks’ net interest margin is near an all-time low.
For the Chinese a real estate crash is an existential threat far worse than in the Western liberal democracies. This is because for ordinary Chinese, a home is the one and only financial asset they are allowed to own. Essentially, in China the real estate market is their stock market and savings account.
Property is seen as a source of economic stability and security. There is a cultural element to this, as owning a home is traditionally seen as a prerequisite for marriage. For this reason, families and friends will pool together money to buy a house for their children to help them with marriage and family prospects.
The Chinese authorities have been trying to nudge private spending towards the consumer market and get the population to shop their way out of the crisis. But the people have instead started to save, with disposable income being put into savings going from an average of 17 per cent three years ago to over 32 per cent now.
Add to this the fact that as much as 70 per cent of household wealth is in property. Naturally this means that there is a serious contraction in consumer spending. If the banks are in trouble, so will be those individual savings.
Property prices have stagnated, in part due to the massive oversupply in the market. Some estimates suggest that there is enough empty property to rehouse the entire 1.1bn population.
The constant rise in house prices means that property has understandably been seen as a lucrative investment. This is compounded by the fact that China currently doesn’t have a property tax. This further facilitates more families and individuals buying second or even third homes in the expectation that prices will continue to rise. But despite forecasts by international experts of price growth this year, it has not materialised.
The fundamental problem is not just oversupply and the knock on effect of stagnation. Property market wobbles impact upon rental and brokering services, industries producing white goods, and construction materials.
The deepest problem is the demographic shift. Due to decades of China’s one child policy there is a rapidly aging population, and a collapse in youth employment. In June 2023, the unemployment rate for those between 16 and 24 years of age in urban areas of China reached 21.3 per cent, up from 20.8 per cent in May.
In response to this, on August 15, the Chinese National Bureau of Statistics suspended the publication of unemployment data. This has caused even greater concern in the markets.
It is simple – if young people don’t have jobs, they cannot get on the property ladder. The problems of supply and demand have an iron rule, and China’s knuckles are being severely rapped with that rule.
What does all this mean for us? The exposure of European corporations to China, both for their revenue and for their supply chain, means that any contraction there could have a devastating impact on the European industrial and consumer base. According to Clingendeal, the Netherlands Institute of International Relations, this exposure poses significant risk.
Combined with the energy crisis, the continuation of the war in Ukraine, and now the possibility of a major conflict in the Middle East, we are looking at an appalling alignment of the economic planets.
If, as is entirely possible, Iran, the backer of Hamas and Hezbollah, is dragged into a broader conflict of its own making, this could cut fuel supplies to China. That eventuality would make even their current property crisis look like very small beer.