China's real estate market shows no signs of improvement in May, and "guaranteed delivery buildings" are in crisis

According to data from the National Bureau of Statistics of China, in May, the sales price of newly built commercial housing in first-tier cities fell by 3.2% year-on-year, a decline of 0.7 percentage points from the previous month; second-tier and third-tier cities fell by 3.7% and 4.9% year-on-year, respectively, a decline of 0.8 and 0.7 percentage points from the previous month. The sales price of second-hand housing fell by nearly 10%, with first-tier cities falling by 9.3% year-on-year, of which Guangzhou had the largest decline of 11.4%; second-tier and third-tier cities fell by 7.5% and 7.3% year-on-year, respectively, a decline of 0.7 percentage points from the previous month.

Stimulus policies are a drop in the bucket

"First, people have no money and cannot afford to buy houses. It is meaningless even if the Chinese government keeps cutting mortgage interest rates. Second, wealthy people do not buy new houses because they do not know whether the builders will go bankrupt and are worried about unfinished buildings. Third, the psychological impact of expecting house prices to fall means that even if they have money, they will wait and see." Wang Guochen, assistant researcher at the First Institute of the Chinese Institution for Economic Research in Taiwan, said in an interview with this station that no one is taking over Chinese real estate and it is difficult to sell them even if they want to. The above three problems interact with each other and it is difficult to see any improvement.

He believes that the best solution to the unfinished buildings is to "nationalize all of them" as the Vice Premier of the State Council He Lifeng recently proposed, requiring local governments to purchase inventory houses. However, the method proposed by the authorities has only been half done. The government has launched 300 billion yuan in affordable housing re-loans, plus incentives, which is at most 500 billion yuan. According to statistics from Wang Guochen's institution, China needs at least 10 trillion yuan to solve the problem, and the current policy is a drop in the bucket and cannot save the property market.

According to the Wall Street Journal, Yao Wei, chief China economist at Societe Generale, said in a client report on Monday that China's multi-year real estate boom ended in 2021, and the real estate industry has been unable to get rid of the problems of oversupply and low sentiment among home buyers. Although the Chinese government launched the largest stimulus measures to date in mid-May to restore market confidence, the market still does not seem to have found the bottom.

Baojiao Building is in crisis and real estate companies are short of funds

According to Sina Finance, Lu Ting, chief economist of Nomura Securities in China, also pointed out in a public speech that China has a serious problem of "guaranteed delivery of buildings". According to some statistics he made last year, the number of "guaranteed delivery of buildings" is conservatively estimated to be between 10 million and 20 million. These overdue delivery of houses are not necessarily unfinished buildings, but the less people buy houses, the less money developers have to build houses: "Everyone used to think that this only happened to private real estate developers, but later we learned that even some very famous large state-owned real estate developers began to face these funding shortages."

Chen Songxing, director of the New Economic Policy Research Center at National Dong Hwa University in Taiwan, said in an interview with our station that the bursting of China's asset bubble has lasted for a long time, and the several stimulus measures released are expected to boost real estate sales and help maintain the liquidity of developers so as not to cause defaults. In addition, for those who pay their loans on time, "guaranteed delivery buildings" can continue to pay their loans without defaulting.

"If something happens to the real estate developer, the entire building itself will become an unfinished building, and homebuyers will ask to stop paying their loans, and the bank's bad debts will increase rapidly. This will also increase the pressure on the banks. Under normal circumstances, the banks will increase capital to pay off the bad debts. The problem is that there are too many hidden bad debts, and the local government may not be able to increase capital for them at present," Chen Songxing added.

1,257 bank branches in China exit the market, up more than 30% year-on-year

The Paper disclosed that recently, data from the China Financial Regulatory Commission's financial license information disclosure showed that in the first five months of this year, 1,257 banking branches nationwide had withdrawn from the market, a year-on-year increase of 30.41%. Among them, more than 60% of the withdrawals were from rural commercial bank branches and rural credit cooperatives and their branches, while 18.06% were from state-owned banks.

After squeezing the banks dry, can we still expect state-owned enterprises to save the market?

Wang Guochen pointed out that a large part of Chinese banks invested in real estate, and they must have suffered a lot of losses. Recently, the People's Bank of China and the Hong Kong Monetary Authority have promoted the merger of small and medium-sized enterprise banks and the closure of branches. He mentioned that this time He Lifeng asked Chinese state-owned enterprises to acquire real estate, but taking the recent "state-owned enterprise fraud" storm as an example, Chinese state-owned enterprises themselves have fraudulent losses, so how can they have money to acquire?

Wang Guochen: "This is not the only time that state-owned enterprises have stepped in to rescue the market. The stock market crash in January also required state-owned enterprises to step in. In other words, banks have been squeezed dry, and now they are turning to squeeze state-owned enterprises. Later, it was discovered that state-owned enterprises were also a pile of bad debts, and there was not much to squeeze."

Can an authoritarian system suppress financial risks?

He pointed out that China's fiscal non-tax revenue grew by more than 10% in the first four months, including a 10% year-on-year decrease in land transfer revenue, which means that fines are increasing; in addition, without funds, China's fixed asset investment is falling, and investment momentum is declining. China is now showing a death cross, that is, the economy is declining and financial risks are rising. Many people mistakenly believe that China is an authoritarian system and has the ability to suppress all financial risks. Compared with Western countries, even if they foresee the brewing of financial storms in advance, they usually rescue the market after the crisis breaks out. However, China has been guarding against financial risks since the end of Jiang Zemin's rule. All the tools that can be used have been used to prevent them until now, but the result is that the risks are still rising: "Once it breaks out, what is left? So it does not mean that authoritarian countries or the CCP can suppress financial risks."