Protests are spreading against the banks. People are getting sick of the Government’s incompetence. The CCP is so afraid that it has brought out tanks to maintain stability. 2022 is not being kind to the Chinese economy. We are just halfway through the year and the Chinese economy is already burning and crashing on various levels. What once seemed to be a composed country with everything in order is beginning to show its vulnerabilities as nothing more than a crumbling house of cards.
Initial GDP growth projections for the nation have been revised to 4.3% in 2022. Almost 1% less than the last projections from December. Multiple pillars of China’s economy are all crumbling at the same time and this is having an exhausting effect on the economy. GDP projections continually shrinking, severe outrage at home, it’s hard to see a way out for the Asian giant. China’s in chaos right now apparently in terms of slowing economic growth.
We’ll discuss Two Main Issues of China’s Economic Turmoil
1) Real Estate Sector
The entire real estate market in China is a disaster waiting to happen. Home buyers, furious at the delayed completion of the properties that they’re already paying for, have taken things into their own hands. Imagine a first-world country getting to a point where real estate development companies are becoming so desperate that they institute a barter trade system to sell homes.
Yes, this is the case with a few real estate developers in the eastern provinces of China. To stimulate sales of properties in the face of what is predicted to be a 25% decline in property sales, the developers are now accepting payments in watermelon, garlic and sometimes even peaches. Yeah, you read it right. Down payments for apartments and houses can now be made with produce. This is the situation of the Economy in China. It all started with Evergrand’s debt default.
Over-indebted developers have since been reined in through the red line policies which have tightened leverage requirements. But this hasn’t solved the entire problem. Since Evergrande, other property developers including Shin Mao and Tsunak China holdings have also missed debt repayment deadlines. This sign of overbearing debt is now threatening to topple down the industry which is responsible for almost 30% of China’s entire GDP.
To shore up, the sector regulators recently reduced the loan market quoted rate. In addition, local governments have been advised to implement their real estate policies according to their needs. For example, some local governments, such as Shanghai, have reduced purchase restrictions on home buyers. Both Tier-I cities such as Beijing and Shanghai and Tier-II cities such as Suzhou and Chiang Chi have lowered Mortgage Rates. These local government policies have frequently been used to boost or dampen real estate activity. Although these measures will ease some major indicators such as property sales and prices, these rules do not necessarily resolve the issues faced by over-indebted developers. They’re just throwing buckets of water onto a wildfire.
Many developers are struggling to repay their debts amid Covid-19 lockdowns and dwindling demands. These measures also fail to address the underlying issues behind excessive property development. That is why the real estate sector in China keeps getting worse with new developments making things more unbearable. Prices that began with Evergrand Real Estate defaulting last year are now snowballing into a bigger crisis.
After the Evergrand fear slipped into the market along with the troubles that developers are facing due to too much debt, angry home buyers have begun threatening to stop their mortgage payments on unfinished projects. This movement which gained momentum on social media is now developing enough for Beijing to take notice of it.
In China, more than 85% of Chinese houses are sold through pre-sale. Mortgages begin months or even years before buildings are finished. However, as projects have slowed since 2020 due to the Covid pandemic along with liquidity issues, it seems that developers won’t be able to honour their agreements. Thus the mobs are amassing.
As homeowners continue to refuse to pay mortgages for unfinished projects, the movement keeps growing larger. The movement against the pre-sale system puts as much as 350 billion dollars in payments at risk. If all these people default, you can expect a scenario that is far worse than the Evergrand crisis to arise.
Chinese authorities are aware of this wildfire danger and have already moved to censor it in a bid to prevent havoc. But the movement is gaining attraction very quickly as it feeds on itself in a circle. As the developer’s cash flow dries up, even more projects are being suspended which then validates the worries and leaves more consumers angry and fearful that those projects may never be finished. The longer the cycle goes on the more trouble China’s real estate market gets into.
2) Banking Sector of China
Adding fuel to the China economic fire are small local banks in the Hanan region of China. Chinese banks are in a delicate position. Citizens are starting to lose trust in the banking infrastructure and the CCP’s ability to protect them from a scam. China is unique in the sense that it has a lot of people. So even though a small per cent of its population lives in rural areas it still amounts to hundreds of millions of people to serve these sectors of the population.
China has over 4000 Independent Banks in rural areas. Yes, I’m talking about Banks and not Branches of a few Banks. They have 4000 different entities. One of the big problems with having such a fragmented banking system is that these banks are highly susceptible to bankruptcy. If anything goes wrong, to fight for survival, rural banks will try to skirt banking laws by accepting deposits online by offering relatively high-interest rates when compared to big banks.
High rates worked and bank deposits grew at an exponential rate. But, the only problem here is that these banks were lying to their customers.
Customers were made to believe that they were getting a 4% interest rate from a regular savings account. But, in reality, they were depositing their money in investment products. The money in savings accounts is safe and guaranteed by the CCP in case a bank goes down. While money in Investment products carries risk and is in no way guaranteed by the CCP in the event of a bankruptcy. These four banks were not only lying to the customers but also not working as per Bank Regulations. They were letting one of their investors have full access to the depositor’s money and the investing company had complete authority over how to use that money. So the worst happened and one of the Chairman of the investing company ran away with $6 Billion of
depositor’s money. When depositors went to withdraw their money, they came to know that their money wasn’t there. This is when they organized their protests to bring attention to the incompetence of regulators. As the protests picked up steam, it now becomes evident that the case is not restricted to these four banks, this could be the norm in most rural banks in China.
When you couple this with the mortgage boycotts that we discussed earlier, China’s banks are very close to a liquidity crisis. If trust between these citizens and the banks is not restored soon it could push China’s financial sector down a dangerous spiral.
