Taken from BBC News Mundo
And one of the first casualties of this new approach by Beijing is the country's second largest housing developer by number of sales.
The giant Evergrande is going through difficult times that have placed it on the verge of bankruptcy . The company is burdened with a huge debt amounting to approximately US$300 billion.
The company's shares have fallen 80% so far this year, coinciding with the tightening of regulations imposed last year by Chinese authorities.
During the summer of 2020, Beijing imposed a rule on the largest real estate developers requiring them to keep their debt levels below certain metrics or "3 red lines" referring to the companies' liquidity, assets, or debt.
"Homes are for living in, not for speculation ," Chinese President Xi Jinping said in 2017.
As for Evergrande, the authorities have indicated that there will not be a full bailout; that is, they will let the company fail if it cannot find money to pay its creditors by selling assets or parts of the business.
However, many analysts believe that the state is likely to nationalize the more than 1.5 million homes that Evergrande has under construction in China to prevent families from suffering if the conglomerate eventually collapses.
The Chinese real estate market is truly atypical.
On average, 90% of citizens own their homes: almost 87% in urban areas and close to 96% in rural areas, according to a study on housing in China carried out by the University of Albany, United States.
It is one of the highest rates in the world.
By comparison, in the United States only 65.3% of citizens own their homes, while in Germany that percentage stands at 51.1%.
As Diego Fernández Elices, director general of investments at A&G, explained to BBC Mundo, "the main objective of the Chinese government is common prosperity , and the fact that so many citizens own their homes makes it a sector that cannot be allowed to fail under any circumstances."
The "common prosperity" to which Fernández refers is the slogan of the latest campaign promoted by the Chinese president, with which he is trying to "reduce a huge wealth gap that threatens the country's economic rise and the legitimacy of the Communist Party government," reports Reuters.
"According to the latest statistics from the Chinese government, construction still accounts for around 30% of total employment and is therefore too important to be ignored," says Yves Bonzon, an executive at the Swiss private bank Julius Baer.
In economic jargon, this is what is called "too big to fail," or at least to fail completely.
Behind this high percentage of owners there are some factors that have fueled for decades an expansion of the sector marked by ghost towns, disused infrastructure and a wild construction model, with exorbitant prices.
In 2020, the country entered what is known as "the era of 10,000 yuan (1,318 euros, US$1,548)," referring to the fact that the average price per square meter remained above that amount for several consecutive months, explains the EFE Agency in a recent analysis.
The "Chinese dream"
One of the important factors that has contributed to the bubble is cultural.
“ The wealth of Chinese households is based on bricks, cement, and speculative fervor . But on the cultural side, there is not only the aspiration to be a property owner, but also an unwritten social requirement that, for example, when you are going to get married, you must own property,” explains Sam Lecornu, CEO and co-founder of Stonehorn Global Partners.
"Not many Chinese people consider renting as their first option. Owning property in China is, by definition, the equivalent of the American dream ," he adds.
Just over 20 years ago, the Chinese real estate sector did not exist.
"For much of the second half of the 20th century, China was a massive public rental society, where private ownership accounted for less than 30%. Housing was considered a social welfare benefit provided with heavy subsidies by the socialist government," says Youqin Huang, a professor in the Department of Geography and Planning at the University of Albany, USA, in a study.
"However, in the 1990s, China launched reforms to privatize and commercialize its housing system , as part of its market transition," he adds, referring to the opening-up process that led to the country's explosive economic growth, especially after its entry into the World Trade Organization in 2001.
A safe investment
Another factor that contributed to home purchases for years was the severe restrictions on foreign investment.
Chinese citizens were then left with only the domestic market.
"If we look at the capital controls that exist within China and consider the assets in which investment is permitted, property is a favorite. And many Chinese own more than one property. They may have a second or even a third home," Lecornu told BBC Mundo.
What often sets this market apart from any other in the world is that buyers typically "pay an initial deposit that is equivalent to 50% of the home price or even buy directly in cash ," says the founder of Stonehorn Global Partners.
The use of bank loans, therefore, is not as intensive as in other large economies.
"Unlike what happened in the United States with the so-called subprime , the Chinese are not massively buying their homes with debt ."
So how do they do it?
The "mom and dad bank"
For sons, in particular, it falls on the "mom and dad bank," backed by the marriage market.
Due to the one-child policy , there are approximately 30 million more men than women seeking partners in China, according to the latest official data.
Chinese parents know that their children's chances of getting married increase if they own a home.
"It is customary for the husband to provide a house," Jieyu Liu, deputy director of the China SOAS Institute, explained to the BBC in 2017, when it was revealed that 70% of millennials (between 19 and 36 years old) owned a house.
Very economical
"Because young people's wages are so low, the husband's family is expected to take responsibility for buying a home in their son's name, or paying the deposit. Many love stories end in failure if the men cannot provide marital housing," she added.
This is also compounded by the fact that elderly family members often move in with their children in their later years.
Therefore, many see that investment in their son or daughter's name as an investment in the future of the whole family.
The "family bank" is also the first resource for those looking for a second home, as turning to parents, grandparents or even in-laws is not unusual in the very thrifty Chinese culture.
The Evergrande Case
Fueled by all these factors, in recent decades a real estate industry has grown with great profits , which in some sectors has become out of control.
The real estate sector of the Asian giant began to overheat in the late 1990s, when regulators at the time gave free rein to Chinese brick 'boom'
Companies like Evergrande began to expand into the food, energy, and even entertainment sectors, with the purchase of a football team, and broadened their objectives to include real estate developments abroad.
This expansion was achieved through bank debt or financed with deposits from home buyers in China.
governments and the central government played a key role in this growth.
"In addition to privatizing existing public housing and ending the provision of subsidized rental housing, the development of private housing and ownership has been fervently encouraged [by the government]," Professor Huang states in his report.
In China, the land belongs to the state.
Any company or organization that wants to develop a project, whether housing, industrial or commercial, must obtain the right to use that land.
This right of use, however, has a time limit; in the case of residential project developments, it is 70 years, after which the State may renew or revoke said right of use .
That's why real estate developers don't usually buy plots of land and keep them undeveloped for years while they appreciate in value, as is done in other countries.
"The government generally sells land [the use of] it selectively and in this process receives money from the sale of the land, which is an important source of government revenue ," Lecornu continues.
Beyond the fact that the real estate sector employs millions of people in China, it is correct to say that the authorities at different levels had an interest in the model continuing to work , the expert adds.
The role of banks
To understand the bubble and the possible domino effect of the Evergrande crisis, the role of the banks, also controlled by the State, is fundamental.
" Chinese banks, insurers and funds have provided significant financing in recent years and the large exposure of Chinese banks to the real estate sector is one of the most significant risks facing the Chinese financial system," says Eiko Sievert, director of the rating agency Scope Ratings.
The firm has lowered its growth expectations for China to 8.6% for 2021, from 9.3%, due to " the weakness of the Chinese real estate sector , which has already slowed national economic activity this year," it adds.
That's why analysts agree that the potential social unrest created by the more than one million unfinished homes that Evergrande has is a bigger problem than the debt itself.
"The world's largest political party is also the largest property owner It has a strong interest in intervening and using all its power to prevent further unrest," Lecornu states, referring to what will be Beijing's most immediate objective: to ensure that citizens do not suffer and continue to believe in the "Chinese dream."
