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China's real estate mess puts global economy on crutches

The deep recession in China's real estate market is becoming a major problem for the country as well as for the world's economy. Photo: Anthony Chong/Pixabay

The deep recession in China's real estate market is becoming a major problem for the country as well as for the world's economy. Photo: Anthony Chong/Pixabay

Published Jun 1, 2022

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Beijing, China - The deep recession in China's real estate market is becoming a major problem for the country as well as for the world's economy.

The property market was one of the few cherished destinations for household savings, with developers and home buyers also willing to take loans from the banks.

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But these good days for China ended last year.

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Household debt touched over US$10 trillion, and around 27% of bank loans in China are tied to real estate, reported a think tank, Policy Research Group (POREG).

This industry was known to be the biggest job creator in China, but now it is termed as the "Lehman moment" - a reference to the 2008 bankruptcy of Lehman Brothers, which was a trigger for the global financial crisis. More so, when the number of empty homes has crossed the 65 million mark (90 million according to some estimates) - enough to house the population of France - and raised the spectre of a global economy on crutches.

The housing market in China is now seen as 'a national threat' as prices rise sky-high, just like the buildings, according to POREG, citing the New York Times.

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Developers borrowed money in the form of onshore and offshore bonds, trust loans, and wealth management products, in addition to bank loans. Thus, lenders span from institutions to the general people both at home and overseas.

Interestingly, Beijing's assault on property debt is part of the country's battle to control corporate debt. Much of the corporate is held by the state-owned firms (SOEs) in which over-indebtedness is the root of the problem with one difference: For SOEs, the debt is laced with government guarantees, and hence there is no imminent threat of liquidation.

China has a debt to pay to the global market. It has benefitted from the globalisation of the market; its companies though anchored behind the Bamboo curtain have spread to all corners of the world with their unadulterated motto that money has no colour.

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A crash in China could bleed into other countries and lead to deflation as well as unemployment, according to POREG, citing CNBC analysis.

Regarding China's failing economy, the US Federal Reserve also felt worried that it could harm the global economy.

"Stresses in China's real estate sector could strain the Chinese financial system, with possible spillovers to the United States," the Federal Reserve said in its recent financial stability report.

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According to POREG, if the Chinese government allows a drop in property prices, lowering reliance on property building as a source of GDP and developing other investment channels will help to curb speculative activity in the housing market.

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