[Beijing Diary] Why Is China Just Watching the Real Estate Crisis?

The real estate crisis in China, which was hardly felt in Beijing, seems to be spreading to the nationwide real economy. Investors who have not received their money back on time are protesting in front of real estate trust companies in downtown Beijing, and the fever for apartment sales in first-tier cities, which had been writing an undefeated myth, has reportedly cooled rapidly. The recent crisis, which is rapidly spreading from the housing market to the financial market, is also being compared to the 2008 Lehman Brothers incident.

However, there is something somewhat puzzling. The Chinese government, which ignited the worsening situation, does not seem to be showing any noticeable moves. If the Lehman crisis was a market-triggered event caused by reckless borrowing by large investment banks (IB) and a decline in housing prices, this time the decisive cause was the Chinese government’s sudden tightening of financial regulations on real estate companies in 2021. Of course, the main reason was the deterioration of the industry’s soundness, but it was also the authorities who allowed it to happen over a long period. Even though it is now too late to contain the situation early, they seem to be merely pretending to care and watching the situation unfold.

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At that time, the government introduced the so-called ‘three red lines,’ which restrict financing if some or all of the conditions?asset-liability ratio below 70%, net debt ratio below 100%, and cash ratio against short-term debt above 1?are not met. They blocked not only stock or bond issuance but also bank loans, and as a result, companies quickly fell into a liquidity crisis. As concerns about domino bankruptcies among real estate developers grew, the market rapidly cooled. Just as when housing prices rise, people tend to spend more under the illusion that their income is increasing, the opposite happened, and consumption was excessively reduced.

There is also an analysis that the series of events is a deliberate neglect by the government with the intention of strengthening control through nationalization. Rather than helping companies recover on their own, there is a ‘big picture’ to eventually turn them into state-owned enterprises directly managed by the government through active mergers and acquisitions (M&A). Park Suhyun, team leader of the KB Securities Research Division, analyzed that China, where real estate accounts for a large portion of GDP, is laying the groundwork to improve its fiscal condition in the long term and directly respond to recessions.

Although the global media have been reporting the situation daily as if waiting for China’s economic downturn, if the concerns become reality, it will not be China alone that suffers. If Chinese consumers close their wallets, Korea’s key exports, including semiconductors, will lose their markets, and the trade balance, which seemed to be improving, is likely to return to a deficit. The recent sharp decline in China’s consumption of major durable goods such as smartphones, TVs, and PCs is linked to the semiconductor market.

It is difficult to predict how the economic situation will unfold in the future, but one thing is certain: China still has some capacity to endure. China is experiencing deflation with negative inflation. Even if the recession fully materializes, there will be no internal systemic collapse severe enough to cause immediate public discontent. Moreover, China has a one-party system. It is not burdened by worrying about voters’ opinions but can be controlled according to the wishes of the president. On the other hand, leaders of major countries including the United States and Korea are limited powers facing upcoming elections. Which side would be more anxious? China’s top leadership likely believes that economic growth of around ‘5%’ as their target is sufficient to save face.

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