Dozens of construction cranes tower into the sky of Fangshan in the southeasternmost district of Beijing, where the capital is gradually fraying, tractors chugging along dirt roads and farmers sweeping up the first leaves on the roadside. There is no trace of the crisis here, which may soon shake the whole country. Not yet.
A new residential complex is to be built in Fangshan in 2023. 15 high-rise buildings, 1069 apartments. They also came up with an English name: Royal Peak – the royal peak. The client is Evergrande, the Chinese real estate company that has been in the headlines for weeks. 300 billion dollars in debt should depress the company. Evergrande was recently unable to service several bonds. All over the world, analysts and economists are asking themselves the anxious question: what happens if Evergrande collapses? Will the state save the company? Or is there a threat of panic selling and an end to the Chinese real estate boom?
In 1995 real estate investments accounted for around five percent of the gross domestic product. In 2019 it was thirteen percent, and the Chinese economic power has doubled several times since the mid-1990s, writes the American economist Kenneth Rogoff. “In an international comparison, the extent of the Chinese real estate boom is certainly unprecedented.” A slump in the real estate market could unbalance the Chinese economy.
So far there has only been an administration building in the shadow of the cranes in Fangshan, with a fountain splashing in front of it. An Evergrande broker receives. In the foyer they built a scale model made of plastic of the Royal Peak. “The connection to our facility is excellent,” praises the real estate agent and drives along the streets with a laser pointer. Tiananmen Square is an hour and a half by car. “And here, when you come through the east gate, you will see a beautiful Chinese garden. With trees that are specially brought from all over the country.” If the plant is even completed.
The square meter will cost 32,000 yuan (the equivalent of 4,300 euros). Since they currently have “a few problems with some suppliers,” he can make an exception and sell a few apartments for 23,000 yuan per square meter. But only if you pay the entire purchase price in one fell swoop. They have furnished four model apartments. One cut worse than the other. Angled rooms, the washing machine is in a bay window in the living room. Until a few months ago, most Chinese didn’t care. The main thing is an apartment. Will someone really move in? Not that important, China’s real estate market works very differently than the rest of the world.
Cables hang everywhere in the apartment, the walls are moldy
Because the returns on savings accounts are low and many Chinese withdrew from the stock market after the stock market crash in 2015, real estate is invested, almost exclusively in China, as no more than 50,000 dollars are transferred abroad per year due to strict exchange controls to be allowed to.
Appointment to view the Beijing diplomatic quarter: the tenement opposite the Saudi Arabian embassy was built in 1980, but it looks much older. Cables hang everywhere in the stairwell, the walls are moldy. “A bargain,” says the agent as she climbs the stairs to the sixth floor. “The apartment has only just come on the market.” She unlocks the door. The air smells stale, as if nobody has lived here for years. The apartment will cost 3.8 million yuan for 56 square meters. “Yes, you have to renovate, but then you should get 6,500 yuan in rent.”
Statistically, it would take 48 years to pay off the apartment. And that even though nobody in China is officially allowed to own an apartment. Since the opening policy, properties have only been leased for 70 years. The decisive factor is the construction date: because the run-down facility is 41 years old, a buyer can only own the apartment for 29 years. Paying 48 years for an investment that you may only have for 29 years? The market has long ceased to obey the laws of mathematics. This can only be explained with the strict belief that the Communist Party will protect the real estate market.
Surprising study: 20 percent of the buildings are empty
Even the huge vacancy rate cannot affect the prices. There are no official figures. The wealth study carried out by a university in western China with hundreds of volunteers provides clues. More than 40,000 households are surveyed. How many pigs does a farmer have? How many cars can a family afford? Is there a share portfolio? Fixed deposit account? Jewels? And property ownership is also queried. The surprising finding of the study was that the vacancy rate is a good 20 percent.
As soon as the scientists published the results, there was protest. Officials, but also bankers and brokers, heavily criticized the survey. Their calculation went like this: Between 2000 and 2010, ten billion square meters of living space were created in cities and three billion square meters were demolished. That means seven billion square meters more living space. In addition, 70 million households moved from the countryside to the cities in the same period. According to Chinese calculations, that equates to 100 square meters per family – quite realistic. How do you explain the vacancy?
The researchers looked at the data again. The problem, it soon turned out, is the 70 million households. Only about half of them had actually moved. A good 35 million families simply stayed in their homes and were incorporated. The country became a city. In fact, 200 square meters were built per household. The dates were correct. But an entire industry believed in the wrong numbers and still does.
Not everyone is allowed to buy a second home, and if they do, this right is inherited
In recent years, the authorities have tried again and again to cool the real estate market. First-time buyers in Beijing or Shanghai must have at least 35 percent equity. If you already have an apartment and want to buy a second, you even have to pay 65 percent. And not everyone is allowed to buy a second home, only citizens of the respective city are eligible in Shanghai and Beijing – this right is usually inherited. However, the shortage drove up prices. The measure of no longer making bank loans available to real estate developers also failed; instead, the corporations launched gray-market funds that Chinese state banks sold to their customers.
For a long time, the leadership in Beijing did not have too much interest in stalling construction activities in the country. In order to keep economic growth stable at seven or eight percent after the financial crisis in 2008, the government made billions for government contracts. Airports were built, cities beautified, the world’s largest rapid transit network was created. Many municipalities have been in debt since then. Some economists estimate the debt ratio at 250 percent of the gross domestic product, others already calculate at 300 percent, depending on how you calculate. A huge bubble.
Almost six years ago, Shanghai finance scientist Zhu Ning wrote a book about it: he called it “China’s Guaranteed Bubble” – China’s guaranteed bubble. In the past few years, if you had dinner with friends in a restaurant in Beijing or Shanghai, everyone only talked about real estate, writes Zhu. The prices were too high, a new apartment, no, that was no longer a good investment, one heard. At some point someone always asked: What has been the best deal in recent years? Of course, real estate, then answered the group. “Has anyone ever lost money on a real estate deal?” Shaking his head.
Zhu’s book hit the market in China in early 2016, a few months after the stock market slumped. In the first half of 2015, stocks on the Shanghai and Shenzhen stock exchanges had risen by an incredible 150 percent. The party press drummed. More and more Chinese were investing. Then came the sudden crash. And the leadership in Beijing tried to stop him, by all means. It pumped billions into the market, ordered trade bans and imprisoned fund managers as alleged scapegoats. Vain. Even the powerful Chinese Communist Party cannot enforce trust. That was the realization at the time. And yet millions of Chinese are now hoping for the party again.
“Without meaningful structural reforms in the Chinese economy and the financial sector, there will be a bubble,” Zhu said at the time. “I hope that this book is a wake-up call and that the bomb can still be defused before the time window closes.” And today? Zhu Ning believes that the government will “still give guarantees” for many of Evergrande’s activities, “but investors will have to sweat.” The bonds will default and the company will be broken up. And then? Pure psychology.