The real estate crisis in China has reached a new peak. Thousands of homebuyers are no longer paying their loan installments in protest. Before banks get into trouble, the Chinese government must intervene now. Fixing the problem will be expensive.

An unusual form of protest has emerged in China. Thousands of homebuyers have been refusing to pay their loan installments since last week – even though they could afford the cost. However, the apartments they are paying for with it are still under construction and this is stagnating in most construction projects in the country. With around 100 construction projects, house buyers are already going on the barricades. They also ignore the possibility of penalties they could face in China’s stringent social ranking system, which penalizes unpaid loan installments.

In China and other parts of Asia, it has been common for real estate companies to sell apartments in large construction projects before construction has even started. The buyers then start paying off the apartments, but can only move in years later after the property has been completed. In China, however, hundreds of such construction projects are currently stalled, some for more than a year. Because it is unclear whether and when their apartments will be ready and because their value is falling every month, homebuyers in around 50 cities are now boycotting the system.

The construction companies, on the other hand, are suffering from a lack of money after years of the real estate boom. Over the years, they built more and bigger buildings, asked for higher and higher prices and got more and more into debt. China’s government pulled the emergency brake last year. Several laws were enacted to prevent a real estate bubble. The core issue was that real estate groups would have to meet stricter regulations in order to be able to get loans and get into debt. Leading corporations warned at the time that this would mean that they could run out of money.

That actually happened many times. The most famous case is Evergrande Real Estate Group. It has been practically bankrupt since last December, but continues to operate. In order to pay off $100 billion in debt, projects under construction were halted and completed buildings were sold. It is estimated that Evergrande accounts for a third of all buildings that are now on strike. To a lesser extent, however, many other real estate groups have also become over-indebted.

For a long time, the Chinese government just looked on. She’s only too happy if some of the real estate giants disappear. The overflowing housing market should consolidate in this way. In fact, the authorities recently instructed banks to give preferential treatment to acquisitions and mergers in the real estate sector.

But the homebuyers’ strike is a serious sign that the real estate crisis could escalate into a banking crisis. After all, the strikers did not take out their loans from the construction companies, which were not very solvent anyway, but from banks. In addition, there are the general economic problems in China, caused by the corona pandemic and China’s strict no-Covid policy, which are also increasing the level of bad loans. What happens when a bank collapses under the burden of unserviced real estate loans is well known from the US subprime crisis of 2007, which escalated into a global financial crisis.

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China doesn’t want to let it get that far. After a crisis meeting last week, the state decided on financial aid. In a first step, the credit hurdles for real estate groups were relaxed so that they can access funds more easily to complete unfinished construction projects. Mergers should also be made easier so that solvent real estate groups can more easily swallow up their over-indebted competitors.

“The most important thing is that the government steps in and builds confidence to solve the problem,” Hui Shan told Bloomberg. He is the chief analyst for China at the major bank Goldman Sachs. Other analysts also assume that the Chinese government has the situation under control. “Our base scenario is that the authorities will contain the crisis,” said Gabriel Wildau from the management consultancy Teneo in a message to his clients. This also includes state banks stepping in with loans in an emergency, meaning that the state ultimately injects the necessary capital or buys up unfinished construction projects.

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