At the heart of China’s current economic problems is the property market. There are so many empty and unfinished apartments out there across the country, and the question is what to do about them, given the overall lack of confidence in the future of China’s real estate overall, along with the long-term slow moving, demographic trend towards fewer people. There is also a web of debt that has entrapped local governments, banks and developers, as well as the ordinary consumers who have put money down to buy the apartments that remain unfinished. A major problem, so what is the solution?
This week there was the hint of a significant step towards movement in the overall state of the situation. It is difficult to say improvement, but at least movement. The proposal as reported by a number of media outlets, is that the Center is planning to announce the purchase by local governments of millions of the apartments that are currently empty or unfinished. This would be a bold step and would definitely change the dynamics of the market. It would indicate that the Center is taking responsibility for the overall real estate market. But it similarly raises all sorts of questions.
First of all, where does the money come from? Second, who gets the money—the property developers, the ordinary consumers with mortgages but no apartment or the banks who loaned the money out to the property developers? And third, at what price level would the purchases be made? If they are priced high, then the bill is huge. But if they if they are priced low, the overall valuation of property across China will fall. It’s all the result of decades of misallocation of funds and short-term thinking, and the chickens were always going to come home to roost at some point. And, as always in these situations, the most likely player to end up bearing the brunt of the cost for resolving the problem is the ordinary consumer, in one way or another.
In other news, there was an important visitor this week—Mr. Putin visited for the first time since the Beijing Winter Olympics in February 2022, just before the start of the unpleasantness in Ukraine. It was an opportunity for both parties to reiterate their mutual support. China has become a significant supporter of the Russian economy and military effort, and Russia is an increasingly important source of fossil fuels to keep China’s economy running. So much hangs on how the Ukraine war is resolved.
Meanwhile, the Shanghai and HK stock markets are holding up well, with Shanghai still above the magic 3000 mark. Various announcements, including the possible impending purchase of millions of apartments by the government, could well be part of an overall effort to keep sentiment as buoyant as possible in the run up to the absolutely crucial Third Plenum in July, at which the overall economic plans for the future are going to be laid out. How the markets react to that will depend to some extent on the state and level of the markets at that point, and some preparation work would appear to be in progress.
Apart from all that, enjoy the weekend.