The bursting of the real estate bubble in China could deal a severe blow to the ailing world economy. Bear in mind that China accounts for one-fifth of the world’s GDP and almost one-third of global economic growth, so the serious crisis in a sector such as real estate, with an enormous weight in its economy, is already a problem of global dimensions.

The real estate sector and associated industries account for nearly 30% of China’s gross domestic product (GDP), almost double that of countries such as the United States. The fiscal stimulus and credit easing plans that started in 2008 to promote consumption have led to uncontrolled growth in the sector over the past 15 years, so the government decided in 2020 to take measures to deflate the huge real estate bubble.

One of them was to force developers to meet strict financial health indicators in order to obtain loans from banks and other financial institutions with a two-fold objective: on the one hand, to curb speculation to reduce prices and make housing accessible to the middle classes again and, on the other, to reduce the weight of the real estate sector in the Chinese economy.

The reality is that many developers have accumulated huge debts. Unable to borrow under the new rules, the sector has encountered serious liquidity problems. The difficulties faced by large groups such as Evergrande and Kaisa Group Holdings and the bankruptcy of many construction companies highlight the extent of the crisis.

The mortgage revolution

In recent months, the closure or lack of liquidity of these construction companies has led to the delay or paralysis of many developments, so tens of thousands of buyers have decided to refuse to continue paying the instalments on their loans, with the problem this poses for the financial system. The loans affected by these protests could amount to 145 billion euros, according to the consultancy S&P Global Ratings, and other analysts even calculate that the amount could be higher.

In less than a year, real estate prices have fallen by up to 30 %. And the Chinese economy is suffering the consequences of the paralysis of the real estate market. The scenario is beginning to look a lot like the one Europe and the United States faced from 2007 onwards, with the creation of ghost cities and ghost airports, so Chinese leaders are struggling to contain what could be the biggest property crash the world has ever seen. Its consequences could shape global economic developments for the next decade.

So far, in the second quarter of the year, China grew by only 0.4% year-on-year, when it was forecast to grow by 1%. And if we compare GDP with that of the first quarter, there was a decline of 2.6%.

In addition to the crisis in the real estate sector, the “zero-Covid” policy, which has caused major mobility restrictions and production problems, as well as the fall in foreign demand due to the recession in the global economy, have weighed heavily on these figures. As a result, youth unemployment is already close to 20 %.

Winds of crisis

The situation looks set to worsen. While the country has increased its share of global manufacturing since the pandemic began, foreign demand looks set to plummet over the next 12 months because of the global recession.

Hence, the huge package of measures unveiled by the government in August, including a 300 billion yuan (44 billion euros) investment in infrastructure, a 500 billion yuan extension of loans to local governments and lower interest rates.

It should be borne in mind that China accounts for almost a fifth of the world’s GDP and its growth accounts for nearly a third of global growth, so a slowdown in the Asian giant may cause serious structural problems in the global system. Moreover, whereas in the previous global financial crisis China came to the economy’s rescue by buying huge amounts of debt from other countries, such a possibility will now be highly unlikely.

In a 2019 study, the US Federal Reserve estimated that an 8.5% fall in China’s GDP would lead to a 3.25% decline in advanced economies and almost 6% in emerging economies.

A tough autumn

China faces the Communist Party Congress in autumn, at which the current president, Xi Jinping, is expected to be elected for a third term, with many uncertainties. He will have to deal with serious structural problems, slowing growth in the face of declining foreign demand and a very high unemployment rate among young people. He may even have to deal with the departure of many foreign companies operating in the country.

Just as Europe catches a cold when Germany sneezes, the world’s economic woes will be aggravated if the Chinese economy loses its vigour.

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