In China, the deteriorating real estate market has caused developers to face cash flow difficulties, and construction work has been suspended across the country. In this photo, the heavy machinery at an apartment construction site in the suburbs of Beijing was not moving. August 2, 2022. (©Sankei by Shohei Mitsuka)
Recently, the suicide of a beautiful young woman in China, a "big winner in life," and an employee of the country's top investment firm triggered a huge shock on the internet. While people heatedly discussed why she would take her own life, a harsh question must be asked: How far has China's real estate collapse progressed?
The woman's name was Zheng Wenlu. She was born in 1994 and was just 30 years old. Her life trajectory can be described as a model of success that many people aspire to.
Winner in Life to Tragic Fall: The Distance is Only Two Pay Cuts
When Zheng graduated from high school, her outstanding academic performance allowed her to be directly admitted to Zhejiang University, China's fourth-ranked university. She didn't need to take the college entrance examination.
During her university years, she interned at the University of California, Los Angeles (UCLA). After graduating, she was directly admitted to graduate school, where she received numerous prestigious scholarships. These included the First-Class Outstanding Student Scholarship and the Dean's Scholarship.
Upon completing her graduate studies, she joined China International Capital Corporation(CICC). It is the largest and most renowned investment firm in China. There, she obtained an enviable securities business qualification.
Zheng frequently shared her experiences of traveling around the world on social media. She once won the Impact Scholarship, allowing her to study, work, and travel simultaneously on a ship, beating out many competitors.
A House in Shanghai
Thanks to the high salary from her company, after working for a few years, she saved enough for a down payment on a home. In October 2023, she bought a house in one of the best areas in Shanghai.
The price per square meter of this house was 156,000 RMB ($21,740 USD), so the total cost for a little over 100 square meters was around 15 million RMB ($2.1 million). She made a down payment of 4 million RMB ($560,000) and took a loan of 11.77 million RMB ($1.64 million). Thus, her monthly mortgage payment was 57,000 RMB ($7940).
However, soon after she bought the house, Zheng encountered a wave of salary cuts. Her husband was also said to be a highly-paid person in the financial circle, so he might have also encountered a wave of pay cuts.
As a result, they could no longer pay the mortgage. At that time, Zheng also had postpartum depression. It is said her husband was inconsiderate and often argued with her.
In such a situation, her company was about to cut her salary again. She couldn't take the pressure anymore, so she ended her life on July 1, 2024, leaving behind a newborn child just a few months old.
CICC's Ten Predictions
The reason why her death caused such a big shock is that it made everyone realize how easily someone can go from enviable success to tragedy. Just two pay cuts were more than enough.
The second reason was that people wondered why she, as an investment professional, had chosen to buy real estate when the market had already begun to collapse.
After her death, it was discovered that at the end of 2022, her company China International Capital Corporation made ten predictions for 2023:
- The United States will experience a recession, with China leading the global recovery.
- The Hong Kong and A-share markets in China will have positive returns throughout the year.
- Following the post-pandemic recovery in demand, China will face inflationary pressures.
- The era of loose monetary policy in China will end, and interest rates will start to rise.
- Real estate sales will continue to increase, with house prices rising slightly.
- Amid the US recession and proactive inventory reduction cycle, China's exports may still face pressure.
- As the impact of the pandemic gradually fades, the broad consumer sector could be a significant area of excess returns in 2023.
- The internet and pharmaceutical industries will start to grow again.
- Overseas funds will flow back into China.
- The US dollar will weaken, and the Chinese yuan will be stronger.
Toeing the Party Line
Now, when we look back, almost none of these 10 predictions were correct. In fact, almost all of them were exactly the opposite.
Perhaps CICC, as a company with a strong state-owned background, was just toeing the Chinese Communist Party (CCP) line to "sing the praises of China's bright economic prospects Unfortunately, CICC's propaganda even deceived its own employees, including Zheng Wenlu, a big winner in life. She took out a huge loan and bought at a high price when everyone else was fleeing the Chinese market.
Failure of the Chinese Education System: Mastering Knowledge Without Gaining Wisdom
Another sad thing is that Zheng majored in English at university and studied finance in postgraduate studies. She had also traveled around the world, so it is reasonable to say that she would not have any problem understanding the outside world.
Unfortunately, many people who have learned a lot of so-called knowledge in the CCP's education system cannot see through the country they live in, which is currently being propped up by lies. They think that everything will continue as it always has, completely oblivious to the impending disasters.
So, how far has China's real estate market fallen?
Macroeconomic Data of Chinese Real Estate: Sales Volume Declines Before Prices Drop
A Chinese economist named Lao Man has addressed this issue with data.
This is the cash flow and development situation of the real estate industry from 2000 to 2024, listed in RMB.
This is the same table but with the amounts converted to US dollars and the area measurements converted to square feet.
The chart below shows the total area and average price of housing sales in China from 2000 to the present.
One can see that housing sales peaked in 2021 at 1.79 billion square meters, based on data registered by housing authorities.
Decline in Housing Sales
Since 2021, sales have rapidly declined, with only 480 million square meters sold in the first half of 2024. This marks a 20% decrease from the same period in 2023.
The projected total sales area for 2024 is about 950 million square meters, reverting to the levels seen in 2009.
Regarding the average sales price, it appears to have stabilized at 10,000 RMB ($1,393) per square meter. However, this stability is misleading. Over the past three years, the contraction in housing sales in third and fourth-tier cities, where housing prices are generally lower, has significantly outpaced that in first and second-tier cities.
Thus, if sales volumes in major cities also begin to drop dramatically, a steep decline in the overall average price is likely to follow.
Lao Man predicts that the scale of China's real estate market sales will soon revert to levels seen before 2008, with annual sales of around 600 million square meters. The average sales price is expected to revert to the levels prior to 2015, about 6000 RMB ($836) per square meter.
Forever Negative Net Cash Flow: Expanding Depends Heavily on Borrowing
The cash flow of real estate companies tells us the truth behind the industry's expansion.
The cash flow is calculated by subtracting the tax paid by real estate companies and the actual funds allocated for real estate development from the total housing sales revenue. The actual investment amounts are reported monthly by the National Bureau of Statistics. The tax amount for real estate companies is estimated at 15% of their sales revenue, which closely aligns with the actual situation.
It is evident that since 2000, the net cash flow of real estate businesses in China has consistently been negative, never once turning positive.
This means that the business model of Chinese real estate developers over the past 24 years has been one of frantic borrowing to expand the scale of development. Almost very single penny made by these businesses has been reinvested into land acquisition and development.
The peak borrowing occurred between 2013 and 2015, with over 5 trillion RMB ($700 billion) borrowed.
Proportion of Currency Created by Developers
What does this figure signify?
For example, in 2014, China's total money supply, M2, grew from 110.66 trillion RMB ($15.42 trillion) at the start of the year to 122.84 trillion ($17.12 trillion) by year-end. This marks an increase of 12.18 trillion RMB ($1.70 trillion).
In China's debt-anchored era of credit currency, all new money was generated through an increase in debt.
In 2014, the debt of real estate developers alone rose by 5.7 trillion RMB ($790 billion), which is 46.9% of the total increase.
This implies that nearly half of the new money created that year originated from the real estate sector.
Hence, the aggressive borrowing by real estate developers was the primary driver behind the significant expansion of China's total monetary base.
Real Estate No Longer a Cornerstone Industry
The golden decade for developers was 2010–2019. Their borrowing over these ten years accounted for 29.9% of the new money created.
In the meantime, people were also taking out loans to purchase homes, accumulating 49.62 trillion RMB ($6.92 trillion) in new loans over the decade.
Together, real estate developers and homebuyers contributed 94.8 trillion RMB ($13.21 trillion) in new loans, accounting for 62.7% of the new money created.
This means that 62.7% of the new money was due to the real estate sector, not including the money generated by related industries such as construction, home appliances, renovations, landscaping, consulting, advertising, etc.
Including these, the percentage is estimated to exceed 75%.
After 2019, the golden decade of China's real estate ended, the borrowing capacity of ordinary citizens reached its limit. Ninety percent of their disposable income was spent on housing, leaving no room to sustain the real estate bubble.
Consequently, despite the CCP's reluctance, it could only watch as the real estate sector steadily declined.
The share of money created by real estate developers dropped from 23% in 2020 to 13% in 2022. By the first half of 2024, it had further reduced to just 10.6%.
This indicates that, within just four and a half years, real estate was no longer a cornerstone industry in China.
Developers Are More Pessimistic than General Populace
Overall, as of 2024, the debt levels of real estate developers have reverted to those seen in 2009. Meanwhile, the public's debt levels have only dropped to those of 2012, indicating that real estate developers are more pessimistic than the general populace.
'Rotten Tail Projects'
The chart of the construction and completion areas over the years tells us another fact. Namely, the reason behind so many unfinished buildings, or so-called "rotten tail projects" in China.
Back in 2000, when China's housing market was just taking off, the gap between the construction and completion areas was minimal. The area under construction was approximately three times that of the completion area. This ratio was normal, reflecting the typical three-year construction cycle of a project and aligning with industry standards.
However, from 2009 onwards, this gap dramatically widened.
After 2011, the completed housing area stabilized at around 900 million to 1 billion square meters. This represented the peak of China's construction capabilities and the management capacity of the entire industry.
By 2022, the completion area had fallen to 862 million square meters due to numerous real estate developers experiencing cash flow problems. This rendered them unable to cover the costs of completing projects.
In the first half of 2024, the completion area was only 265 million square meters, a 21.8% drop from 339 million square meters in the same period of 2023.
Based on current trends, the total completion area for 2024 is estimated to be around 600 million square meters.
Pressure of Delivery
Let's now estimate the so-called pressure to "ensure delivery," which means to deliver the sold but unfinished projects.
From 2019 to now, China has sold a total of 8.23 billion square meters of housing, but only 3.24 billion square meters have been completed since 2021.
Assuming that all the housing sold before 2019 was delivered before 2021, there are still 4.99 billion square meters of sold but uncompleted housing.
Assuming an average of 100 square meters per unit, this equates to about 49.9 million housing units.
These are what are referred to as "unfinished buildings" or "rotten tail projects," where one has paid for a home that will never be fully constructed.
In other words, nearly 50 million households, encompassing over 100 million individuals, have been overwhelmed by the collapse of the real estate bubble.
Even worse, the buyers need to continue to pay mortgages for homes they will never live in. What happens if they lose their jobs or face salary cuts?
By the end of June 2024, real estate developers will still have 6.968 billion square meters of construction remaining. This represents the inventory held by developers, accumulated over many years through substantial debts.
'Absorbing' Inventory: Mission Impossible
To "absorb" this amount of inventory, 930 million urban residents in China would each need to purchase 7.5 square meters.
However, the per capita living area for urban residents in China has already surpassed 30 square meters, reaching the standards of moderately developed countries. This indicates that China no longer has a shortage of housing.
Given the current economic situation, Lao Mao believes that it would be impossible to absorb such a huge amount of surplus areas.
Furthermore, local governments continued to sell land use rights. If they hadn't, local finances could have collapsed overnight.
So in 2022, 110,000 hectares were sold, and in 2023, another 85,000 hectares.
Thus, the current scenario is that, on one hand, the inventory held by real estate developers is so vast it cannot be sold off. On the other hand, local governments, in a bid to maintain their last breath, are still frantically selling land use rights, increasing the housing supply.
This absurd vicious cycle can no longer continue, and even the entire monetary system is unsustainable.
What Next?
The next step, printing money out of thin air, might be the only solution. And the Chinese populace might soon face a crisis similar to that experienced by Venezuelans.
Therefore, Lao Man concludes that China's real estate industry has reached a stage of brain death, with the heart completely ceasing to beat. Now, only a slight neural response remains, where a prick might still cause a toe to twitch.
The real estate sector accounts for 25% of China's GDP and 40% of local government revenues. Furthermore, 70% of Chinese household assets are invested in housing. That means the total collapse of this industry poses significant questions for China's economy.
What would the implications be? Moreover, when would a financial and banking crisis, sparked by the real estate sector's downfall, commence?
These are likely the critical issues we need to consider and confront moving forward.
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Author: Jennifer Zeng
Find articles by Jennifer Zeng on JAPAN Forward. Follow her on X (formerly Twitter) and on her blog page, Jennifer's World.
