Here's Why China Can’t Sort Out Its Property Market Mess

China’s property market has been in a downward spiral for five years, with little sign of the crisis abating. Even after the collapse of real estate giant Evergrande, values are continuing to plummet. Households in financial distress are being forced to sell properties, and apartment developers that racked up enormous debt on speculative projects are on the brink of collapse. Lulu Chen, who leads our team covering Asian real estate, joins host Stephen Carroll to discuss.

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Caroll, and
this is Here's Why, where we take one news story
and explain it in just a few minutes with our
experts here at Bloomberg.

Speaker 2 (00:19):
It was the nation's biggest property developer, a household name.
So when they fall, it is a reflection of the
falling of the wider sector, the popping of China's property bubble.

Speaker 1 (00:29):
If you're already some science, as this is broadening to
not just an overgrind issue. China's authorities trying to rescue
a third property developer from plunging into default.

Speaker 2 (00:38):
It's a problem for China, it's a problem for challenging market,
it's a problem for the bank. So it's going to
be a long road through what's recovery for the China
property sector. We might still see this continued consolidation and
reduction in the number of property developers in China.

Speaker 1 (00:52):
It's one of China's biggest growth drivers. But the country's
property market has been in a downward spiral for years.
Prices have claimed many victims, including what was once the
country's biggest developer by sales, ever Grand. Since twenty twenty two,
Beijing has been taking steps to try to rein in
a market that had gone too far, but the property

(01:14):
slump continues to weigh on the economy and more builders
are at risk of collapse. Here's why China can't sort
out it's property market mess. Lulu Chen, who leads our
team covering real estate in Asia it joins me now
for more, Lulu, what's gone wrong in China's property sector?

Speaker 2 (01:35):
If you take a broader step back, the longer term
prospects of China's property market going up forever and never
was never sustainable. The country has reached a point whereas
population growth is slowing and also supply and demand is
basically at an equilibrium. If you talk to some analysts,
you know, people ask just what was the trigger? And

(01:58):
it's hard to pinpoint. If we had to put a
timestamp on when the effects of the property crisis came
into full swing, it probably happened after the government itself
tried to pop the bubble by implementing a rule called
three Red lines, and that policy itself was to curb

(02:19):
the amount of debt that China's property developers could take on.
After that, the vast majority of real estate companies had
trouble accessing credit, which quickly then spiraled to difficulty to
pay their debts, and also they got locked out of
the debt market, and then quickly it spiraled from there

(02:41):
where you started seeing the biggest developers, including Evergrand, having
financial troubles and then companies not being able to finish
the construction projects that they already pre sold to buyers
more than four years on. As of now, the country's
property prices are still falling, and also new home sales

(03:03):
transactions are also steepening their decline.

Speaker 1 (03:07):
So with that context in mind, what has Beijing tried
to do about the issue that was created by those
measures they put in place back a few years ago.

Speaker 2 (03:18):
Short answer is, the big Bazuka that people have been
waiting for has never really arrived. They've issued many, many
sweeping measures trying to mend the issue, but we're not
seeing like a massive bailout for developers that never came.
They have eased financing for some developers and also have

(03:42):
asked banks to ensure growth in residential mortgages. Some other
incremental measures. They've relaxed home sales curbs in most of
Chinese cities. Also, the government has pushed out some infrastructure projects,
but not at the level that people think would completely
reverse or inject a massive flooding of liquidity into the market.

(04:05):
But the country is looking at incremental steps to help
renovate so called urban villages, which is these patches of
neighborhoods and cities that are underdeveloped.

Speaker 1 (04:16):
So what sort of effect have those measures had. What's
the current situation in the market and for developers.

Speaker 2 (04:23):
The media effect is that the scare that people had
thinking that this would be a complete financial contagion collapse,
that moment never came. So even with all the developer
companies being liquidated or falling into distress, China's financial markets

(04:44):
have largely remained firewalled from all of this. And part
of it is because the banks that led to these
real estate companies, huge parts of the loans are just
being postponed in payment, so they get rollovers. And then
I think for the developers themselves, if you look at
all the developers who have been still buying land in

(05:06):
the past year, it's largely state developers. Private companies are
largely out of the market now and the biggest companies
that used to dominate the market, Country Garden, Vankee evergrad
these firms are still struggling, and most of the private
developers are either facing huge significant challenges for restructuring their

(05:30):
debt or have been outright order to be liquidated.

Speaker 1 (05:35):
What more could the government do in this area? Is
there political will to act further?

Speaker 2 (05:40):
That's a great question. They could if they wanted to,
but we're not seeing any signs that the government is
going to implement that as of now. Everything from the
very top level, the guidance and the rhetoric that has
come out of top political meetings this year is that
they want to avoid flooding the market with a ton

(06:03):
of money and then over correcting the market. I think
the ideal scenario that they're trying to aim for is
just to stop the price declines that as of now
are still happening.

Speaker 1 (06:17):
What's at stake for the broader Chinese economy here.

Speaker 2 (06:20):
Yeah, there's a lot at stake because so much of
China's health, household wealth is tied to the property market.
The country is now trying to revive or trying to
encourage consumption, but with so much wealth evaporating and tied
into the real estate market that's still declining, people are

(06:43):
reluctant to spend. There's also been incidences that really shakes
the core of the ruling party, which is that during
the worst chapter of the property crisis, when developers were
not able to deliver the presold homes, it triggered widespread
mortgage boycotts and also online protests where people outright refuse

(07:06):
to pay their bank loans. So these are cases that
the government wants to avoid, and definitely they are trying
to make sure that this doesn't escalate into a situation
where the protests originating from online moved into the real
world and people take to the streets.

Speaker 1 (07:26):
Okay, Lelie, Thanks very much to Chen. They're leading our
team covering Asian real estate. Thank you. For more explanations
like this from our team of three thousand journalists and
analysts around the world, go to Bloomberg dot com slash explainers.
I'm Stephen Carroll. This is here's why. I'll be back
next week with more. Thanks for listening.