The crisis in the construction industry shows that the Chinese state’s usual methods of dealing with economic problems are less and less effective.
jungle world, 15.02.2024
A Hong Kong court has ordered the liquidation of China’s heavily indebted second-largest real estate group, Evergrande. The crisis in the construction industry shows that the Chinese state’s usual methods of dealing with economic problems are less and less effective.
Higher! Further! Faster! China’s bloated real estate sector continues to set new records – even as it runs out of steam. The world’s tallest abandoned building, the 597-meter Goldin Finance 117 skyscraper, stands not far from the capital Beijing in the northern Chinese city of Tianjin. It is just one of many empty skyscrapers in China: The greatest speculative dynamic in the history of the capitalist world system has left huge ghost towns in its wake. Some 65 million apartments for which there are no buyers stand empty. At the same time, millions of small investors who paid for their properties in advance are still waiting for their longed-for condominiums because the companies they entrusted with their money to ran into economic difficulties before they could finish building the planned properties.
Link: https://exitinenglish.com/2024/06/11/after-the-boom-all-that-remains-are-ruins/
The best-known case is Evergrande, China’s second-largest real estate group, which has a record $300 billion in debt. Evergrande filed for bankruptcy in 2021. Since then, the group has continued to build apartments, but has been unable to service its loans.
Evergrande: Part of A Gigantic Ponzi Scheme
For years, Evergrande was effectively part of a gigantic Ponzi scheme: as long as investors kept putting up money, new construction projects could be launched. At the end of January, a court in Hong Kong, where Evergrande is listed on the stock exchange, ordered the insolvent company liquidated. The lawsuit was brought by foreign investors who wanted to recover at least some of the money they had borrowed back. However, it is still unclear whether the ruling can also be enforced in mainland China, where the vast majority of Evergrande’s properties are located.
The Chinese government is under pressure. It must pursue two conflicting goals in dealing with the real estate crisis. On the one hand, following the court ruling, it is under increased “global scrutiny,” as the Neue Zürcher Zeitung put it, as to whether and how it is addressing the demands of foreign investors. In the current economic situation and with capital flight on the rise anyway, the government can hardly afford to alienate foreign investors. But breaking up the group also carries great risks. Nearly 100,000 workers at Evergrande alone could lose their jobs, plus many times that number at the various construction sites. And hundreds of thousands of homebuyers have already paid for Evergrande apartments but have not yet received them – what should happen to their claims?
Therefore, it seems unlikely that the Hong Kong ruling will be enforced in mainland China. The Chinese Communist Party is likely to prioritize the angry army of middle-class Chinese homebuyers, for whom real estate is the most important form of investment, over foreign investors, by continuing to keep Evergrande alive with government loans, for example. Overall, the Chinese government seems to want to prevent a rapid bursting of the real estate bubble, preferring a slow, gradual deflation. This has so far prevented a crash of the real estate market with numerous bankruptcies of investors, construction companies and small investors, but at the cost of a crisis that has dragged on for years with no end in sight.
Absurdly Inflated Real Estate Market
However, it may be too late for a “cleansing storm” on the absurdly inflated real estate market. This is simply due to the size of the Chinese construction sector and the capital invested in it. US economist Kenneth Rogoff put the contribution of the Chinese construction and real estate sector to China’s gross domestic product at around 29% in 2021. At the height of the construction boom in Spain in 2006, which was similar to that in China, the figure was around 28% and in Ireland it was around 22%.
The real estate bubble is a consequence of Chinese state capitalism’s gigantic economic stimulus programs and strong credit growth, a response to the crisis surge of 2007-2009, which, ironically, was itself triggered by the real estate crisis in the U.S. and Europe. In order to stimulate growth, the Chinese state banks made more and more loans available for infrastructure and real estate construction. Local governments in particular have accumulated trillions of dollars in debt. However, real estate companies like Evergrande were also able to borrow almost unlimited amounts of money for years – until the government restricted lending in the real estate sector in 2018 to curb speculation.
For Evergrande and many other construction companies, this was the beginning of their downfall. Country Garden, for example, the largest private property developer in the People’s Republic, defaulted on its loans in October and had to be bailed out by state banks with billions of dollars. Country Garden’s debts amount to the equivalent of $200 billion.
The U.S. rating agency Moody’s is already drawing parallels with Japan’s period of stagnation, the so-called “lost decades” after the end of the Japanese real estate boom in the early 1990s. The Chinese deficit economy has clearly exhausted itself – the mountains of debt are growing, while the resulting economic returns are dwindling. However, the Chinese government cannot afford to let this gigantic speculative bubble burst.
Crisis Trends Are Becoming Increasingly Apparent
This is because the economy as a whole is slowing down and crisis trends are becoming increasingly apparent. Unemployment among 16-24 year olds was 21.3% in June 2023. The government has since stopped publishing official figures. China’s stock markets are experiencing a veritable price massacre: The broad-based CSI 1000 index lost 37% of its value in a year – until the government stepped in at the beginning of February and promised increased stock purchases by sovereign wealth funds to drive share prices back up, at least for the time being.
Chinese state capitalism does have greater scope for economic intervention than its Western competitors: much more capital is controlled by state banks or in other ways by the state, which can therefore control to a greater extent the areas in which investment should flow. However, this also means that the speculative bubbles can grow even larger, while their bursting is delayed – thereby exacerbating the problems and prolonging their duration.
In order to conceal the extent of the crisis, the Chinese authorities now seem to be reverting to a real socialist tradition that also characterized the Eastern Bloc in its late phase: embellishing the statistics. According to the Chinese government, the economy grew by 5.2% last year, which would have met the five percent growth target set at the beginning of the year. However, the Financial Times reported that many companies operating in China are now questioning the official growth figures. According to some of these estimates, economic growth is actually only around 1.5%. When the International Monetary Fund (IMF) predicted a weaker economy for the current year and slower growth in the medium term (3.5% in 2028), Chinese government officials reacted “indignantly” and called for a “more appropriate forecast.”
Last year, Bloomberg reported on similar discrepancies between the official figures and unofficial surveys regarding price trends on China’s real estate market. According to government statistics, the market has proven to be “remarkably resilient” despite the crisis at companies such as Evergrande: Prices for new apartments are said to have fallen by only 2.4% between 2021 and August 2023, while prices for existing properties fell by 6.4%. However, data compiled by Bloomberg from portals and surveys of real estate agents paints a bleaker picture: even in prime locations in metropolitan areas such as Shanghai and Shenzhen, prices are said to have fallen by “at least 15 percent.” The situation is similar in “more than half” of the major cities in the People’s Republic.
Even when it comes to quantifying the Chinese debt burden, opinions differ. This is due to unreliable data and the large sector of so-called shadow banks, i.e. financial companies that are not subject to banking supervision. What is clear, however, is that the total debt of the People’s Republic – which accumulated enormous foreign exchange reserves through trade surpluses from the 1990s into the first decade of the 21st century – has risen much faster than economic output since 2008/2009. According to official figures, China’s debt “doubled” between 2008 and 2023 to about 280 percent of GDP. The strategies that Chinese state capitalism has used in recent years to overcome economic crises are therefore increasingly reaching their limits.
Originally published in jungle world on 02/15/2024