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Would China Export a Real Estate Bust?

Ichiro Suzuki



The world’s second largest economy is grappling with unraveling of its real estate market. It has escaped a spectacular collapse so far, since the Chinese Communist Party is making every effort to keep it from succumbing to gravity. Instead of sending shockwaves, the current state of China’s real estate may be a catastrophe unfolding in slow motion. This is not the first time the world has witnessed such a catastrophe. 


Over 30 years ago, the then second largest economy descended into debt deflation on its real estate market’s breathtaking fall. The Japanese authority mismanaged a banking crisis caused by real estate’s implosion, by refusing to face the problem squarely. The crisis in Japan sent ripple effects in the early 1990s, to the areas where Japanese developers were very active. These places included Australia, Gold Coast notably, Hawaii, California, London and its vicinity, etc. 


In China today, its economy is sinking into mild deflation and the government’s mishandling of the crisis looks even worse than Japan thirty years ago. Aggressive intervention into the market by the stability-obsessed Communist Party is distorting market mechanism gravely. Full effects of China’s real estate bust are yet to be felt when the market force finally overwhelms the mighty Communist Party. 


Unlike the case of Japan in the 1990s, however, there are reasons to think such adverse effects can be confined within China. To begin with, Chinese buying spree of prominent overseas assets, including real estate, did not last very long. It was for a limited time only through the mid 2010s. A heated overseas expansion boom was reined by the Chinese authority that was alarmed by growing capital outflows. That mattered greatly to China, where capital controls are strictly enforced and the currency is not free-float. Beijing’s determination stopped institutional capital outflows. At the very least, large acquisitions of western assets by Chinese corporations no longer made headlines. Capital outflows into the developing world, in the form of Belt & Road Initiative, remained robust for a while, but this also saw a marked decline by the end of the 2010s. In the West, a bar was raised for Chinese corporations to buy their assets for fear of China’s economic invasion. Some really aggressive Chinese corporations such as Anbang and HNA went too far on debt-fueled expansion in overseas as well as the domestic markets. Eventually, they had to be taken care of by authorities: insurance regulator for Anbang and the government of Hainan for HNA. Liquidation of these companies didn’t result in dumping assets into the market. Implosion of those companies were still limited in scale from a macro economic perspective to allow the authorities to step in to stop bleeding.  


As investments into overseas assets stopped, the domestic real estate market became a preferred destination for Chinese risk money after the mid-2010s. Until the outbreak of the pandemic, China’s real estate market remained buoyant. After all, it absorbed excessive amount of risk money until the problems became far too large even for the CCP.

 

In the meantime, wealthy Chinese people continue to buy houses outside of the People’s Republic. This is one thing wealthy Japanese didn’t do in the Japanese economy’s heyday. In all likelihood, Chinese buyers have been doing this without borrowing money from Chinese banks. If they do borrow, lenders must be local banks in the city where they buy houses. Most likely, they must be buying ones out of their cash position for the purpose of letting their money leave China, escaping tight capital controls. Houses bought without borrowed money are not dumped into the market when the market turns sour since the owners are under little short-term pressure. They want their money out of China and such investments can be sticky. 


Some regional banks in the U.S. are under pressure lately on the real estate market’s slump. The Fed’s aggressive monetary policy to fight the unexpectedly stubborn post-COVID inflation weakened house prices in the United States and Canada. Regional banks were hit hard in the spring of 2023. A turmoil that started with Silicon Valley Bank’s failure didn’t develop into a full-blown banking crisis because of the Fed’s preemptive action. Silicon Valley banks went under due to asset-liability mismatch rather than a mountain of bad debts. More recently, New York Community Bancorp (NYCB) suffered a share price collapse due to a shockingly ugly result. This was, however, a macro economic and industry-wide issue, not narrowly focused on Chinese investments. China money doesn’t seem to be retreating from investing in houses outside their country. Vancouver, BC is still trying to fend off inflows of foreign investments so that houses don’t go farther out of reach for locals. In Kyoto, Japan, young Japanese families are leaving the city as rents are too high for them. Steady inflows of Chinese money into traditional ‘machiya’ houses are contributing to preserve the ancient capital’s scenery. On the other hand, it is making Kyoto unlivable for some. Though it is causing problems to some people, this is still better than a real estate bust. 


About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.



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