Due to economic weakness, China has been compelled to change its approach. In June, the central bank reduced interest rates, and the State Council, China's cabinet, announced discussions on implementing new measures to support the economy. Potential options include further relaxation of property restrictions, tax incentives for consumers, increased infrastructure investment, and incentives for manufacturers, particularly in the high-tech sector. However, Goldman Sachs analysts in China suggest that property and infrastructure stimulus will likely be cautious and targeted due to factors such as a shrinking population, high debt levels, and President Xi's call to curb property speculation.
The limitations of relying on large infrastructure-led stimulus become evident when observing areas like Zunyi or traveling to the countryside. While the underdeveloped and mountainous province of Guizhou initially required some investment, it is now inundated with costly bridges, tunnels, roads, and airports. Unfortunately, it is struggling to repay the debt incurred from financing these construction projects, leading to pleas for assistance from China to address its severe debt crisis. Zunyi, a city with a population of 6.6 million, has two different airports located about an hour away from downtown. Additionally, there is another airport in the city of Liupanshui, three hours away by car. Despite its construction cost of 1.5 billion yuan ($208 million) in 2014, this airport now sees few commercial flights. During a recent visit on a day without scheduled flights, the terminal was virtually empty, with only a security guard, a few cleaners, and attendants in deserted shops having their lunch. Much of the funding for these projects, as well as others across the country, came from local government financing vehicles—companies created by municipalities to borrow on behalf of cities, towns, and provinces—without reflecting this debt on their balance sheets. This "hidden debt" poses a significant risk to China's local governments and raises concerns among investors who have purchased bonds from these financing vehicles.
According to the International Monetary Fund's estimate in February, the nationwide hidden debt reached 66 trillion yuan at the end of 2022, a sharp increase from 40 trillion yuan in 2019. This surge illustrates how local governments resorted to off-book borrowing and spending during the pandemic. Local governments themselves are facing financial pressures as they have become reliant on land sales to property developers to supplement their budgets, but this revenue source is drying up due to the housing market downturn. With the central bank initiating interest rate cuts and cities across the country easing down-payment requirements and lifting restrictions on purchasing multiple properties, the lackluster state of the property market may gradually change. However, due to significant oversupply, it will take time for any property stimulus to translate into actual housing construction, if it happens at all.
In Hangzhou, home prices in some neighborhoods have plummeted nearly 30% since their peak in late 2021, as reported by multiple real estate agents. This sudden decline marks a stark contrast for the prosperous city that hosted the Group of 20 summit in 2016. Wang, the wife of an Alibaba employee, decided to list one of their two apartments in the city for sale in early June following a round of job cuts at the tech giant. Reflecting on the situation, Wang expressed, "For the first time, the layoff news made me rethink whether the mortgages we've undertaken are too high." She preferred to be identified by her surname only since she discussed a personal matter. "It might be time to prepare for darker times ahead," she added, contemplating the potential challenges that lie ahead
No comments:
Post a Comment