LOOMING MORTGAGE CRISIS IN CHINA

 In Chinese economy about one third of the economic activity had been contributed  by the real estate sector and housing alone accounted 70 Percent of households wealth. Housing was regarded as the most important investment by the Chinese people.For years property developers thrived because of no worry about funding. Access to credit was very liberal,cheap and about 90% of new homes were pre sold. Buyers would hand over deposits and make mortgage payments, and even invest in bonds issued by the real estate firm before construction was complete. This system provided developers with robust money they needed to keep building and real estate booming like anything, until recently home owners didn't complain, and the expectation was that property values  in China would continue to maintain rise as they had for decades and the Chinese middle class continue to aspire for climbing the property ladder.

 As property market growth was characterized by home owners purchasing the apartments before they were being built and some deep cracks developed in the existing system,realising the risks involved Chinese authority started to regulate and crack down the excessive borrowings by developers. In August 2020 People's Bank of China ordered real estate firms to follow 3 red lines- 1,Liability  asset ratio at 70%.2.Net debt ratio 100%.3.Cash to short term debt not more than 1x.If the developers failed to  meet any of  the 3 red lines regulators would then place limit  on the extent to which they can grow debt. The move resulted in severe cash crunch for majority of firms that had relied on easy access to debt funds to keep construction projects working. As financial stress deepened real estate giants like  Evergrande and gradually others spiralled into default and in December 2021 Evergrande was declared as defaulter and the impact rippled across the industry subsequently to over 12 real estate firms. The housing development reached such an alarming height that China have now many unoccupied ghost towns with estimated 50-64 million empty apartments. Sales of new apartments fell by 35% in the first five months of 2022.By June housing prices declined  more than two third in 70 large and medium cities as per National Bureau of Statistics. On the other hand mortgages outstanding in banks at the end of June was 41trillion Reminbi ($ 6 trillion) constituting about 40% of GDP .Total household debt is about 60% of or 114% of household's disposable income. 

For about four decades property sector anchored Chinese growth not only with construction sector providing more employment along with manufacturing  but also a harbinger of rapid urbanization in the country. Consequent on the real estate crisis  a rare defiance was witnessed mostly from people  who bought property from indebted developers and are refusing to repay loans on their unfinished apartments..For decades buying property was considered a safe and prestigious investment in China. At present contrary to building a foundation of wealth for the country's middle class the  real estate has turned into become a source of anger and discontent .In more than 100 cities across China thousands of home owners are organising together and refusing to repay loans of unfinished properties, in a country where even minor protests are quelled.According to them"Life is extremely difficult and we can no longer afford the monthly mortgage.We have to take risks out of desperation and follow the path of a mortgage strike". The influence of strike is spreading and the number of properties where collectives of home owners have started to boycott has reached 326 cities nation wide and more home owners across the country are expected to join boycott by August end. ANZ Research estimate that boycott calls could  affect about $222 billion of home loans.According  to China Real estate information  in the first half of 2022 sales of China's 100 biggest property developers fell by 50 %.In July hundreds of  related companies that are providing services and supplies to property sector like construction firms and land scapers issued a joint statement to the government authorities informing about "the crisis of survival" because they hadn't been paid for several months.

In order tide over the crisis a correction in real estate development is overdue. Politbureau China's top ruling body instructed local  governments to make sure that unfinished buildings are completed.Experts observed that even if Chinese authorities provide developers with enough capital the underlying homes are still overvalued. In order to attract new customers builders are now  desperately offering incentives like car, pigs and even jobs etc. For failed developers authorities prefer Mergers and acquisition backed by bank loans. According to unconfirmed reports China will  launch a 300 billion Reminbi real estate fund to help property developers to overcome their debt crisis. Authorities are also considering allowing households to suspend mortgage payments on halted projects. Other measures suggested include - accelerate social housing development using financing sources like Pension Fund, to set up insurance mechanism to protect property buyers against developers going bankrupt and leaving incomplete housing projects. Banks would be encouraged to provide mortgages only to buyers with such insurance. However  there is much uncertainity and vulnerabilty in providing bailout simultaneously to property developers, banks and property buyers. 

Deceleration in Chinese growth rate,geo political tensions,frequent lockdowns and reduction in employment,decline in manufacturing sector (China has been termed as "World's factory"),real estate crisis and the Belt and Road intiative started in 2013 has seen a surge in loans going bad like for  the newly built port in Colombo, prompting China to issue countries with emergency credit.All these factors indicate brewing debt crisis not only impact China but also other vulnerable economies like Srilanka and Pakistan.It may be noted here that substantial portion of Chinese manufacturing have migrated to Vietnam, Thailand, Indonesia , Bangladesh Laos and to a limited extent to India.In any case the intensity and impact of emerging debt crisis in the second largest economy is bound to create impact on the global economy as well, though the extent and magnitude are uncertain and yet to unfold fully.