China’s pre-construction Growth Slows!
Thousands of Chinese homeowners have refused to pay $300 billion in mortgages, causing social upheaval. 301 mortgages in 91 locations have stopped paying. China’s social instability has highlighted several weaknesses, which will influence the globe. Over 400,000 Chinese had bank deposits frozen. The ATM refused depositors’ withdrawals. People panicked when they couldn’t withdraw cash. A decade-long fraud conspiracy froze the banks. Chinese social media is rife with bank freeze protests. While just five banks froze, social discontent escalated when the bank demonstrations went viral. 200-300 billion yuan property fund reportedly insufficient. Sales are down 20%. 30% fewer construction starts.
Chinese homeowners aren’t paying their mortgages, so officials propose pausing payments. $300 billion in delinquent mortgages. The mortgage boycott and bank freeze will have a cascading effect. Five banks failed, which will spread to 20, 100, and the whole financial sector. The Chinese banking system uses fractional reserves, like most others. When everyone withdraws their money at once, the banks won’t have it. Banks generated money from thin air. Economists worldwide believe China’s current social upheaval signals the country’s economic collapse. The mortgage boycott wasn’t unexpected.
Years of mismanagement and selfishness caused the boycott. Chinese residents were ready to buy any home since house prices continued rising. Like the 2008 crisis, they couldn’t picture property values falling. People saved for years to buy real estate due to rising prices. 70-80% of Chinese family assets are real estate. Imagine saving for decades to buy a home. Chinese culture encouraged younger generations to emphasise homebuying. Such a purchasing frenzy fueled a decades-long property bubble. Developers used greed to grow quicker. Here came pre-sale.
The pre-sale approach let purchasers put down deposits on unfinished homes. Indeed. Mortgages were paid for unbuilt homes. In the housing bubble craze, buying pre-sale properties made logical. Homebuyers expected prices to rise. They feared the property’s price would rise significantly by the time it was done. Homebuyers risk purchasing in pre-sale to get reduced prices. Pre-sales accounted for 34.5% of property development revenue, according to the Chinese National Bureau of Statistics. Developers would utilise pre-sale profits to offer additional pre-sale properties.
This concept operated like a Ponzi scheme as housing values rose. The pre-sale strategy crumbled when customers grew dubious. Developers frequently provide a completion date for a property. When developers missed deadlines, homebuyers lost faith. Because developers used pre-sale money to offer additional pre-sale properties, they couldn’t purchase the houses. In the past, fresh pre-sales were used to support earlier ones. Like a Ponzi scheme, fund administrators exploit incoming investments to pay off earlier investors. Ponzi schemes only succeed if the sponsor can consistently raise money. Once a Ponzi scheme can’t attract new investors, elder investors can’t be compensated. Like the Chinese housing market. Pre-sold homes have been paid for, but the developers can’t complete constructing them. Before the boycott, developers often failed to deliver pre-sold houses. Only 60% of pre-sold houses from 2013 to 2020 were constructed, according to Nomura Holdings.
The bubble continued to rise despite evident Ponzi scheme symptoms. 900 purchasers signed a petition in June 2022. Evergrande was the largest property developer at the time. Evergrande generates 500 billion yuan ($74 billion) annually, according to Fortune China 500. Pre-sale house purchasers petitioned the government. Homebuyers threatened to cease paying mortgages if Evergrande didn’t begin building within three months. Massive property titans dismissed the petition at the time. Evergrande didn’t know. 301 projects in 91 cities would be added. The boycott started in Henan and extended to Hunan, Hubei, Shaanxi, and Hebei. Banks are already reporting missed mortgage payments after three months.
Chinese people have typically paid off most mortgages, so the criticism is unusual. Banks may lawfully demand full payment. Despite illegality and cultural customs, the government has paused momentarily. China lowered mortgage rates numerous times this year. The 5 year loan prime rate was decreased from 4.6% to 4.45% in May 2022.
With this management, incomplete properties will never see the light. Imagine China’s building being halted. Defaulting on unfinished homes would wipe out $58 billion in debt. Economists anticipate this concern to expand across the property industry and damage billions in mortgages. A property developer executive told Reuters, After repaying bank loans, it’s nearly hard to repay onshore and offshore bonds. With Ponzi revealed, property developers can’t pay back loan. Evergrande failed its $300 billion debt deadline. Despite months of preparation, bondholders allege Evergrande hasn’t even begun.
Evergrande’s debt is unretractable. Who will purchase more homes? Nobody will invest if they raise money. Nobody will purchase their pre-sale homes.