The mortgage revolt cracked the Great Wall of China

The huge real estate boom tempted the citizens of China to invest all their wealth in new houses. Now they find that the real estate companies are collapsing and their houses will remain on paper. In a rare occurrence, a quiet uprising of buyers who have simply stopped paying their mortgage is threatening to collapse China’s most important industry – and the authorities are doing everything to hide and extinguish it

Calcalist supplement 11.08.22


In recent weeks, what appears to be one of the most significant threats to the social order in China in decades has been developing. The spark that ignited it might have seemed almost banal: a local protest by several dozen citizens who purchased apartments in a project by the real estate giant Evergrande in the city of Jingda-Jen years ago, the construction of which has been delayed for a long time. First, the frustrated buyers drafted a 590-word letter of protest and sent it to Evergrande and the banks that financed the mortgages in the “Dynasty Mansion” project, which includes 14 huge buildings that remain only partially built. The letter included an ultimatum, according to which the apartment buyers who took out mortgage loans would stop paying the monthly payments if they were not given a commitment that construction would resume by October 20.

Then, in June, they uploaded a petition on the subject. The petition was open and did not defy the government, but blamed the banks that financed the mortgages, but did not fulfill their role as intermediaries between the buyers and the real estate companies and did not see the completion of the construction.

Only a few days passed and the petition went viral and gained wide resonance on the popular social networks WeChat and Dwayne (the local version of Tiktok). The virality has since been followed by similar or identical letters from apartment buyers across the country who have found themselves in a similar situation. In some cases, these are huge projects of tens of thousands of apartments, which are planned to be built in the Chinese style of saturated construction: dozens of residential towers with tens of floors each. The numbers grew steadily, and today there are already hundreds of projects in almost a hundred different cities where the buyers joined the protest. According to an estimate, hundreds of thousands of households in China have invested money in projects that have stalled – and not only in Avgrand’s. On the list you can find projects of some of the largest real estate companies in China, such as Shimao, Kaisa and Sunac. Moreover, the protest did not stop with the apartment buyers. Also suppliers and companies of building materials and construction services, to whom the real estate companies owe sums Big money, began to refuse to provide services and goods and even threaten to stop loan repayments to banks.

In the first days after the start of the protest, the traditional media in China dealt with it and analyzed the situation, usually siding with the buyers who remained powerless against the banks and giant companies. But as the protest intensified, the administration began to reduce its public exposure, fearing the formation of a snowball that could not be stopped. Those who are currently looking for information on the subject, or even the original protest petition, will not find it on the Chinese network, which only presents the narrative that the administration is interested in. Almost the only possibility to find information is to rummage through a special project called “Summary of mortgage strikes registered throughout the country”. It was created by the anonymous user “WeNeedHome” and is hosted on the popular community software development site GitHub. This is currently the only public source of information, and it seems that it is no longer updated either. As of this moment, the Chinese government also manages to hide this protest under the surface.

A police officer watches over citizens who gather in front of the Evergrande headquarters in Shenzhen. Contrary to the perception in the West, the government sees its role in finding a solution to the economic problem. Photo: AFP

A tsunami of mortgage defaulters

The People’s Republic of China, on paper at least, is a communist country. In the first decades after its establishment, all the land and houses were owned by the state. In the late 1990s, the real estate market in China began to be liberalized and private ownership became possible. Since then – 30 years or so – apartment buyers haven’t really encountered significant declines, certainly not a crash. That’s why there have almost never been cases of banks going bankrupt in China, and mortgages have almost never been paid. always in full.

Real estate is a very significant part of the Chinese economy, and according to estimates contributes about a third of its GNP. Real estate loans account for more than a quarter of bank loans. And in modern China, houses have always been a safe asset that “makes money” steadily and regularly and helps households increase their capital. Prices have always gone up, demand has been high, and everyone has benefited: the local governments in the provinces have brought in a lot A lot of money in their coffers from the sale of land for construction; the construction companies profited from the tough demand, which resulted from the desire of family owners to own a house; and the buyers enjoyed an almost constant price increase and the ability to mortgage the property. For many households, the house constitutes more than 70% of their wealth.

The common purchase model in China is that of “new from the contractor” apartments: the construction companies purchase the land and sell the apartments in advance, so they are only required to invest about a quarter of the cost before the sale. The rest, with the addition of the profit, they receive from the property buyers. This model, along with factors such as social norms and status symbols, made the purchase of the new houses a cheap option compared to the purchase of second-hand houses, and therefore also much more popular.

As long as the price increase continued, things went smoothly, at least to the appearance. But in practice, real estate has become a real systemic risk. Economists and researchers who follow what is happening in China have identified a large debt bubble that has only been increasing for decades, and even more so in recent years. Real estate makes up about 30% of the Chinese economy, and in recent years it seemed that the bubble in this sector It has the highest chance of exploding. Such an explosion is the main risk factor for the stability of the financial system in China, because houses are not only the basis for household mortgages, but they also serve as collateral for a large part of the loans in the business and commercial sector, of small and large companies. In fact, the entire financial system in China is connected and affected by the real estate market.

The Chinese government was not blind to this risk. Already in 2017, Chinese President Xi Jinping reiterated the importance of reducing leverage in the Chinese economy in general, and in the real estate market in particular. Since then, the reduction of leverage has become a significant measure in evaluating the performance of senior officials in the party, in the various provinces, and in companies across China. To this day, every time When it seemed that the bubble was on the verge of bursting, the administration knew how to deal with the problem on a point-by-point basis and dampen its effect, in a way that prevented a systemic collapse.

This is the reason why the increasing wave of mortgage refusers, which threatens to become a tsunami of buyers who abandon their debt because their apartment is not built, threatens the regime so much.

As the protest intensified, the administration reduced its public exposure. Today, the original protest petition cannot be found online

“The Three Red Lines”

Getting air out of such a large bubble is not a simple task. And it is much more difficult when there are already many external economic challenges that slow down the economy. Shay repeated many times in recent years a key phrase: “Houses are for living, not for speculation.” This motto was designed to address the real estate bubble, and the systemic risk inherent in it. It also fit very well with the social concept that Xi promoted, under the title “Shared Prosperity”: a more equal distribution of wealth and a return to socialist values ​​that were pushed aside in the decades when economic policy in China focused on growth at any cost.

But as long as the words were spoken, even if they were spoken by the powerful supreme leader, the celebration continued and the bubble continued to swell. Too many factors in the Chinese economy had something to lose from stopping it. By August 2020, the Ministry of Housing and Urban-Rural Development and the Central Bank of China presented a clear, measurable and enforceable policy to reduce leverage and reduce risky debt in the real estate sector.

This policy is known as the “three red lines”, which are three requirements for the balance sheet of a real estate development company in the country: the value of the assets must be at least 70% of the value of the liabilities; the net debt must be lower than the equity; and the cash value must be higher than the value of short-term loans. The program included a quality catalog of the real estate developers according to four colors: green (for the best), followed by yellow, orange and red (for the worst). In essence, green companies enjoy financial flexibility and the ability to increase liabilities. The reds, on the other hand, who do not meet any red line, are not allowed to increase their obligations. And as far as the government is concerned, anyone who does not follow any of the red lines can fall – and only have themselves to blame.

An Evergrande cultural and residential center whose construction has stalled in Suzhou (above), and a project stuck in its peak whose buyers have joined the mortgage revolt. Photographs: AFP, Reuters

The market goes down and the problems are exposed

As happens many times in the economy, the administration’s attempt to cool the market and reduce leverage surfaced problems that had been hidden until then. Real estate companies could no longer raise money with the ease they had become accustomed to, they began to suffer from a liquidity problem and eventually defaulted on the bonds they issued. First, problems were discovered in small or medium-sized companies: at the beginning of 2021, China Fortune Land was unable to meet the bond payments , and in July the Sichuan Languang company also encountered the same problem. Both are significant real estate developers in China, but the debt of neither of them comes close to that of Evergrande, one of China’s two largest real estate developers.

Its collapse in September last year, when it started missing interest payments on the bonds and came close to insolvency, had already made headlines around the world.

Evergrande’s replica debts accumulated to 300 billion dollars, creating fear of a global chain reaction, since among the debtors were also large investors outside of China. Its liquidity difficulties caused Avergrande to use all the money it had at its disposal, including funds accumulated from buyers who paid in advance for houses they had purchased and not yet built. In some cases, it was even reported about loans that the company took, shamelessly, from its own employees – who are apparently still waiting for the money. Thus the company also prioritized the most burning repayments to the bondholders, also reached insolvency later, and was completely depleted of capital that would allow it to complete the projects it had committed to.

This is how a crisis was created in China that the market has not yet dealt with. The orders of magnitude made it difficult for the government to intervene or guarantee the debts, and the justified concerns, especially of the buyers, soon led to a price correction. And like a vicious circle that feeds itself, the decline increased the pressure among all the factors that depend on real estate prices, and only intensified the crisis.

Visualization of the City Light tower in Ningbo. Evergrande had to sell it before it was completed for $200 million to reduce debt. Photo: Evergrande Group via CTBUE

Visualization of the City Light tower in Ningbo. Evergrande had to sell it before it was completed for $200 million to reduce debt. Photo: Evergrande Group via CTBUE

photo caption Photo: ???

And only for the president to be elected on the third

This brings us back to the muted mortgage revolt. Various reports have linked him to protests that turned violent in China’s Henan province, where several small local banks failed. Ha-Nan, which has more than 100 million inhabitants, is indeed the district with the highest number of projects related to the protest, but at the moment there is no direct connection between the things.

Even so, the Chinese government is caught in a dilemma: legally, such a civil uprising is prohibited, what’s more, participating in it may damage the credit rating of the mortgage refusers. But a well-publicized or public fight on the part of the government could further damage the restoration of consumer confidence, which also plunged drastically and unprecedentedly in the face of the strict corona lockdowns. Therefore, various statements from government officials show that he intends to give a “grace period” to those who have stopped their mortgage payments, in cases where the project they purchased has indeed not been progressing for some time. The exact duration of the “non-progressive” period has not yet been determined. Contrary to the accepted view in the West, the administration sees its role in finding a solution to the economic problem, especially when it is of such a scope and profile, and not only in unrestrained suppression of the protestors.

The required solution is to complete the construction of the houses. That way there will be valuable tangible assets – and not just on paper. But how do you do it when the real estate companies have no money? Who is responsible for financing the completion of the construction if the entrepreneurial company cannot do it? And who will the imperfect properties belong to until they are transferred to the buyers?

China’s advantage in this case is the ability of the central government to force a solution that the whole system will mobilize to: local governments, the construction companies and the financial system. Xi himself has spoken out on the issue and the government has already “asked” some of the large real estate companies, private and government, which are not in significant difficulties, to purchase some of the problematic projects and complete them, in exchange for benefits and incentives. In Baha-Nan, for example, a local fund was established under the leadership of the two large government real estate companies in Zhengzhou, the capital city of the province, and they are expected to try to “save” as many projects as possible whose construction is questionable. The central government is also encouraging the banks to return to giving loans to some of the companies so that they can complete the stalled projects, and has declared the establishment of a huge government fund amounting to tens of billions of dollars that will help rescue at least some of the companies and financial entities.

All these seem to have been derived from the number of moves of the administration to deal with economic crises. But in the present case the situation is different. In the past, such rescue moves took place when the Chinese economy grew at rates close to 10% per year. 2022 is already looking like one of the lowest growth years in China’s modern history, even compared to the corona lockdowns of 2020. Solving such major systemic problems requires a huge infusion of funds and trust in the government by all parties in the system. And it becomes much more difficult against the background of the war in Ukraine, global inflation, the trade war with the United States and the disruptions in the supply chains. Perhaps even more than anything else, the administration’s insistence on the strict “zero corona” policy, which collapses in the face of the micron strain and makes the task almost impossible, is burdensome.

All this is happening at the most sensitive political time in China, a few months before the opening of the historic Party Congress in the fall, where President Xi is expected to be elected for an unprecedented third consecutive term. Therefore, what is happening in China underground, certainly against the background of the severe economic crisis it is in, may develop from the president’s point of view into a nightmare scenario.


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