As China's real estate sector crasghes, Evergrande and other developers take the Chinese economy along with them.
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The “Strong 100” is a term frequently discussed in the context of China’s real estate industry.
In Chinese, this “Strong 100” refers to the country’s top 100 real estate developers. Naturally, most of China’s big name real estate developers are included in this list.
On December 2, China’s economic media outlets all published shocking news about the “Strong 100”.
According to CRIC Research, a private research institute that compiles and analyzes information on real estate across China, the total sales of the ”Strong 100” in November of this year stood at about 750 billion CNY (roughly ￥13.4 trillion JPY, or $117.5 billion USD), down 3.4% from October, and down 37.6% from the same period last year.
Among the various statistics used to examine economic conditions, the year-over-year comparison is generally considered the most important. For example, the economic growth rate of a country, which is expressed as a year-over-year comparison, is the most appropriate indicator of the growth or decline of an economy.
Accordingly, the fact that the combined sales of China’s “Strong 100” real estate companies fell by nearly 40% in November compared to the same period in 2020 surprised the nation's financial news media and sent major shockwaves through the real estate market.
These figures attest to the rapid cooling of China’s real estate market and the emergence of a grave situation that could shake the real estate industry to its very core.
One cause is the recent surfacing of information on the debt problems of the China Evergrande Group, one of China's leading property development giants. Since then, domestic investors have become increasingly apprehensive about the future of the real estate market and have begun to shift their investments away from real estate.
While the future of the real estate market remains in question, the China Index Academy, a private research institute, released some statistics on December 1, that suggest a bleak future for the real estate market.
In order for real estate companies to develop property in China, the right to use the land must first be transferred to them from the government. According to the China Index Academy statistics, the total amount of land transfer fees paid by the “Strong 100” companies from January to November 2021 was 2.346 trillion CNY (￥4.205 quadrillion JPY, or about $37 trillion USD), a 17.7% decrease from the same period in 2020.
While this 17.7% drop is a very serious figure, another set of figures released by the same research institute is even more shocking.
In November 2021, the top 50 companies of the “Strong 100” paid 72.3% less for land transfers than in October this year, and 91.4% less than in the same period in 2020.
Declines of 72.3% and 91.4% are extremes rarely seen in the field of economics. What this sharp decline in land transfers means is that real estate developers have made up their minds to not develop any real estate for the time being, in anticipation of a cooling of the real estate market.
As winter approaches, it seems that China’s real estate development industry might go into “hibernation”. If this becomes a reality, the blow to the Chinese economy as a whole could be unfathomable.
Last year in 2020, real estate investments made across China totaled roughly 14 trillion CNY (about ￥250 trillion JPY, or $2.2 trillion USD) for the year. China’s gross domestic product (GDP) for 2020, the same year, was just over 100 trillion CNY (￥1.8 quadrillion JPY, or $15.8 trillion USD), pointing to the fact that real estate investment accounts for about 14% of GDP.
Factoring in spillover effects, it is commonly accepted in China that about 30% of the economy is dependent on real estate development.
If China's real estate development industry heads into “hibernation”, we could see an immediate and significant decline in China's economic growth rate that could capsize the entire economy. It seems that the Chinese economy is about to enter another “severe winter”.
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(Read the Sankei Shimbun China Watch column in Japanese at this link.)
Author: Seki Hei
Find other articles by the author in English on JAPAN Forward at this link.
