Bubbles Gotta Pop

When China’s real estate bubble pops, it ain’t going to be pretty.

China’s real-estate bubble is the largest in human history, and despite years of warning signs, it has grown and grown, spilling over into the rest of the world.

It’s hard to overstate just how crazy China’s real-estate market is: 25% of the country’s GDP comes from construction, and 80% of the nation’s wealth is in domestic property holdings. That’s $65T, nearly double the size of the economies of every G7 nation combined.

The market has been kept afloat through China’s massive “shadow banking” system, itself such a systemic risk that the Chinese government has been forced to crack down on it. Now, China’s massive, blue-chip property developers have had their debt downrated to CCC and are struggling to issue new bonds — Moody’s rates the debt of 51 out of 61 Chinese property companies as “junk.”

China has 65 million vacant residences, but prices remain stubbornly high, even in “tier-two” cities like Jinan, where a 1000sqft apartment costs RMB2M, while a worker may only earn RMB6,000/month.

This has tanked sales volume (down 44% year-on-year in the first week of 2019), but developers are not able to lower their prices in the face of popular uprisings from people who have overleveraged themselves to buy into the tier-one city markets. In one case, a cut to the price of unsold units sent Shanghainese property owners into the streets chanting and holding up signs reading “Give us our hard-earned blood-and-sweat money back!”

The nation is staggering under massive real-estate debt, $3.4 trillion worth of it, and 47.1% of that is tied up in vacant properties, and the people who borrowed that money are not receiving rental income, nor are they living in those properties. The banks that lent that money could face a massive wave of defaults.