One of the main economic activities on which was based the investment plan of the Chinese Government to avoid the deepening of the crisis of 2007/2008 and allowing the maintenance of the pace of growth was the construction industry.
In 2008/2009, the government invested into the economy US$586 billion, besides $1.5 trillion of State banks lines of credit. The most immediate goal was to maintain the booming economy and avoiding 30 million workers to be laid off permanently, so that there was no risk of unrest across the country. The long-term goal was to “decouple” from the crisis of the imperialist countries and allow China to pass unscathed through the financial crisis waiting for an improvement of the situation a few years later.
The model was the crisis of the “Asian Tigers” of the early 1990,s whose investments policy permitted China to change growth pattern and become the “factory of the world” for the exportation of cheap goods. To do this from 2008, the state invested heavily in infrastructure such as roads and railroads, leading the development to the extremely poor inner provinces of the country. On the other hand, banks began lending money at very low interest rates to contractors, local governments and consumers.
The first ones invested in the construction of luxury buildings for the middle class. The local governments, in association with companies, have dedicated themselves to the expropriation of rural areas on the outskirts of large cities; the consumers mortgaged their property and their future real estate to finance ownership.
The deal due to the easy credit thrived and created a huge speculative bubble in real estate market. Prices rose continuously. In 2010, camps of consumers were erected at the front of the broker offices so that they did not lose the opportunities of buying the apartments, even though the condos had not yet been built, as this guaranteed lower price.
In Sania, a tropical town and tourist paradise in the south of China, prices have increased more than tenfold between 2004 and 2010, with the square-foot price reaching US$300, in a country where the workers’ average salary is US$200! In Shanghai, property prices grew 150% between 2003 and 2010. National average prices tripled between 2005 and 2009.
The real estate “hot market” had an inevitable consequence; a race of capital to the construction industry, causing an unprecedented housing overproduction. Modern ghost towns recently built in China and without buyers are already known and a huge series of videos on the internet illustrates this reality. It is estimated at 64 million the number of vacant flats, not counting commercial shopping centers. In Tianjin, for example, there is more office space than can be absorbed in 25 years at the current rate of occupation.
There are several indicators that demonstrate the swelling of this bubble, or in other words, the overproduction in the construction industry. One of the most used is the price-to-income ratio, the ratio between the average price of real estate and the average annual revenue achieved with the rent of buildings in a region. According to the World Bank this index shows the degree to which the prices are affordable for the people and the existence of distortions in the “market”. It is assumed that an index above 3 is considered unaffordable for purchase and rent of housing by the population. However this index is 27 in China, and when the income of a couple is considered!
Investment in Chinese real estate market attracted not only the traditional real estate capital. Steelmakers, chemical, textile and footwear opened departments for construction and real estate financing, with the expectation of return greater than core businesses. The share of real estate in the country’s GPD rose from 2% in 2000 to 6% in 2011, a figure similar to the U.S. investment when the housing bubble burst.
Overproduction threatens the beginning of a construction industry recession.
After the boom of construction the business underwent a proportional freezing, in the second half of this year. According to the China Real Estate Index System, the number of deals fell by more than 50% in 6 of the 35 cities surveyed in the first week of November, and in 28 of them the number of transactions fell, compared with the previous year. The average of 100 people per day in the broker offices dropped to 3 or 4. And “none comes to buy”, vents David Zhang, Sales Director of the investment company Honor-Link.
The description of the New York Times gives a good picture of what had happened: “(…) 20-foot-long banners on balconies with the phone numbers of speculators desperate to sell. Ads have grown on the Internet for unfinished apartments at up to 28 percent off the price at which developers were selling them a few months ago… Real estate transactions have slowed so quickly that in the last two weeks, brokerages across China have laid off thousands of brokers and closed hundreds of offices.”
A Beijing Company, the Real Estate Company Geland, for example, closed 20% of its 250 offices and the Centaline Property Agency, with the head office in Hong Kong, closed 60 of its 385 offices in Shenzhen City and fired 1,000 of its 8,000 employees.
Who pays for the bill, as always, are the people. Older buyers are seeing the resale value of their condo collapses, in some cases without even being finished, while repaying their loans based on inflated prices. To further exacerbate the Government increased the interest rates as it can reflect on the increase of installments to be paid.
The demonstrations against real estate devaluation are on the increase. The demonstrators use to occupy the broker offices and destroy models of the buildings being sold at lower prices. Officers of the Communist Party of China have started to call to the people, threatening them to stop protesting.
Bursting or hollowing out?
To avoid a housing bubble explosion at American style, the Chinese dictatorship took a series of measures. Firstly, it has pushed up interest rates three times this year and set limits on bank lending, making it harder to borrow money and increasing the tax burden of those who had made loans. New property taxes were imposed; rebates to buyers of its first homeowners were eliminated and measures were taken to hinder the number of mortgages for each individual borrower and sales to buyers from other provinces. In addition the down payments for mortgages were raised up to 40% to protect the banking system from losses due to lack of payment.
The government says it wants to prevent the advance of speculation. According to the Prime Minister Wen Jiabo the Government has no intention of changing course, stating that “there is no possibility of loosing real estate policies. Our target is to let the property price fall to a reasonable level.”
The government tries to give a demonstration of strength and control of the situation, but in fact, it is trying to deploy measures after the beginning of the bubble bursting to prevent bankrupts of real estate financing banks. That is, to avoid breaking the state banking system, which is the source of credit to the construction industry. It has already disclosed that 20% of loans made are unrecoverable, a significant loss.
However there are indications that this is only the beginning of an industry downturn. As stated David Zhang “We are on the cusp of winter, and we don’t know who will survive it and who will not.”