“A popping sound, not unlike the finale of a fireworks show, echoed through the area, and a cloud of dust billowed up into the air”… “In less than a minute, they collapsed into piles of rubble.” This description by Nikkei Asia is not about an earthquake, but depicts the unfinished apartment buildings abolished in Kunming, Yunnan Province late August 2021. Due to financial difficulties, the developer abandoned construction, and the buildings went unattended for seven years, making them too dangerous to occupy.
Unfortunately, till today, China’s real estate crisis has not yet been mitigated. Many projects have been suspended, throwing homebuyers of unfinished projects, who put almost all of their hard-earned money into housing, into desperate circumstances. On July 14, Yi Cai newspaper reported that preliminary statistics show there are currently about 150 real estate projects cutting supply across the country, including in about 20 provinces such as Henan, Hunan, Jiangxi, Hebei, Guangxi, and Shandong, and nearly 70 cities and counties. Real Estate giants like Evergrande, Yango, Tahoe, Sunac, Kaisa, etc., have gone bankrupt.
Like a cancer cell: Abnormal and uncontrollable expansion
Following a “Notice to suspend construction” issued on June 30 by a real estate contractor in Jingde city, Jiangxi Province, the property owners jointly declared the suspension of installment payments, sparking a movement to announce the cessation of installment payments in many Chinese cities.
Such a phenomenon might be the tip of the iceberg. According to Nikkei Asia, there have long been anomalies in the Chinese real estate market.
Based on a study by professors Kenneth Rogoff of Harvard University and Yuanchen Yang of Tsinghua University, Nikkei pointed out that the market value of the real estate has more than tripled in the past decade. Over the same period, even the U.S., with a surplus of funds, only experienced growth of 1.7 times, making China’s rapid expansion truly exceptional.
According to Rogoff, the real estate sector constituted 29% of China’s GDP, greater than Spain and Ireland’s peak levels during the financial crisis in the 2010s. Moreover, many wealthy people in urban areas own multiple houses, and the vacancy rate is over 20%, higher than in Japan or the U.S.
“The supply and demand are completely unbalanced,” highlighted the report. Today, while some buyers of unfinished homes even opted to divorce to reduce the effect of a bad credit rating, “ghost cities” with a modern appearance but unoccupied apartments are rampant in China. According to Business Insider, China recently has at least 65 million empty houses, enough to accommodate the entire population of France.
Nowadays, while China’s nominal GDP accounts for only 70% of that of the U.S., land prices are more than double. “There is a good chance that the forced expansion has already peaked,” concluded the report.
In medical science, a cancer cell ignores signals that usually tell cells to stop dividing or to die. But unfortunately, China’s real estate market ignores warning signals such as unfinished projects and ghost towns and continues to expand like a bubble. One may wonder why such a process happened.
In China, land sales accounted for a significant part of local authorities’ revenue, at about 41.6% in 2021, according to Caixin. On July 11, user “Qiandatong” on China’s largest online discussion site Zhihu revealed that this fact essentially explains recent incidents in Henan. In China, the land transfer fee paid by new homebuyers is a one-time payment, accounting for about 70% of the house price. If the regime wants to earn significant income from land, continuous purchases of new houses are required. Because authorities cannot demolish old cities, they are keen to develop so-called new city zones. After new cities’ lands are tendered, local authorities can collect money to continue building other new cities.
As far as the public’s concerned, given the difficulty of doing private business in China due to the controls and corruption of the communist apparatus, many people viewed real estate as a “safe” investment, buying houses and apartments only to resell them directly and earn a profit.
But this profitable deal will one day end due to a lack of demand. The speculative system kept inflating the real estate bubble until it burst.
Invade and ruin healthy cells
In medical science, cancerous cells invade nearby areas and spread to other areas of the body. This characteristic seems to describe how the real estate market also leads to failure in different sectors of the economy.
Farmland and inequality
First, the uncontrollable development of new city zones directly causes the area of farmland to shrink. According to Reuters, China’s agricultural land area has fallen by more than 29,000 square miles, or nearly 6%, over the 2009-2019 period, significantly due to rapid urbanization.
For example, in Shijiachong village, Hunan, 10 members of the Dai family have only seven acres of land to farm, which, according to Dai, would be enough for one person. He added that his family would be happy to rent or sell their land, but they are not allowed. Under the communist regime, the “public” owns the land, and peasants cannot buy, sell or rent plots of land to create economically viable larger tracts. In addition, they can’t use the land as collateral for loans, which prevents them from raising capital.
Even worse for farmers, in 2014, the Chinese authority stated that about 20% of the country’s agricultural land is contaminated.
Today in China, “Inequality is quite serious. The inequality within cities and within rural areas has also been expanding. Now urban residents roughly earn 2.5 times that of rural residents,” noted Bloomberg.
Foreign Policy once revealed that while peasants obtain profits of less than 5% of the value of their land, real estate developers earn up to 60%, and the rest goes to the coffers of the local authority.
According to SCMP, The World Bank Group has recently warned that the COVID-19 pandemic has widened the rich-poor gap in China, primarily due to the ownership of flats—the most significant source of household wealth and debt.
Considering recent bank runs in Henan, Qiandatong commented that it was all linked to the real estate market. Real estate developers do not dare to accept the land without home buyers. Thus, local authorities have no revenue. Then how to afford their operating expenses and investments? They immediately set their eyes on rural banks’ money.
Qiandatong pointed out that, first, local banks lend money to urban zones building investment companies to receive land for projects, with real estate projects as collateral. So the authorities can collect taxes to fund their activities. However, the buildings often come with high prices, poor quality, and an inferior general environment and cannot be sold. Consequently, the buildings, one by one, start to be unfinished, putting rural banks in danger of default.
According to Financial Times, the past few years have witnessed a rise in bank runs among China’s 3,902 regional lenders. Central bank data as of December 2021 shows that although such “high-risk” institutions represent just 1% of total assets in China’s banking system, bank runs have raised anxieties among regulators of potential risk contagion and social instability arising from the financial system.
“As the Chinese economy slows down further, the fiscal shortage worsens, and the debt repayments become more widespread among Chinese companies, especially in the real estate sector, bank runs could become more frequent and on a larger scale,” said Frank Xie, a professor at the University of South Carolina Aiken.
Trick the immune system to protect it
Cancer cells can tell blood vessels to grow toward tumors and trick the immune system into protecting instead of attacking them. Similarly, China’s real estate market also succeeded in attracting continuous investment and stimulus.
State mouthpiece Xinhua Net on May 28, reported that “China has actively rolled out targeted measures such as relaxing restrictions on purchases or sales, adjusting housing provident fund policies, and lowering mortgage interest rates to better cater to the residential buying market, and boost the development of the property market.”
In their June 2022’s Economic Update, The World Bank emphasized, “There is a danger that China remains tied to the old playbook of boosting growth through debt-financed infrastructure and real estate investment. Such a growth model is ultimately unsustainable and the indebtedness of many corporates and local governments is already too high.”
The collapse of the whole system foretold
Recently, William R. Rhodes, former chairman and CEO of Citibank, and Stuart Mackintosh, executive director of nonprofit “The Group of Thirty,” have said on CNBC that China’s economy is put on the brink of danger by the current real estate crisis, with defaults continuing. Property development represents 25-30% of China’s GDP, “a stumble in real estate bodes ill for the economy as a whole,” stated the authors. In addition, economists showed that most recessions are related to equity or housing busts.
The Chinese regime has been aware of the real estate bomb for a long time. Shortly after coming to power in 2013, President Xi Jinping said that China needed to “change the approach to improve the quality and returns of economic growth… to pursue genuine rather than inflated GDP growth.”
Regrettably, Xi’s words never came true. Is this because the housing market has been a “gold mine” for many corrupt Communist Party officials? Or because “beautiful” growth figures are needed to justify the rule of the CCP, which lacks legitimacy based on democratic votes?
Given the surprising similarities between China’s real estate market and cancer cells, there is reason to worry about a foretold collapse of the whole system under the communist regime. So how to cure China’s body from this deadly disease? A possible hint may be to track the cause of all these anomalies—a distorted “socialist market economy with Chinese characteristics,” a “power economy” manipulated by the communist cadres.
Traditional Chinese culture believes any disease or suffering arises from karma accumulated through bad behaviors in the past. Given all the bloody debts of the Chinese Communist Party over the past century, including but not limited to the Cultural Revolution, Tiananmen Massacre, and the Falun Gong persecution, recent natural and man-made disasters might be the alarming bell of retribution.
Chinese people are like passengers on a ship about to sink or travelers on a train going over a cliff. So how could they save themselves? For the nearly 400 million people who have declared to quit the Chinese Communist Party and its affiliations, the answer might be “jump out of that ship or train.”