China and its economy are notoriously difficult to analyze and evaluate. With its mix of government control and closely held data, China’s true economic performance is a closed book, making third-party analysis often seem like little more than guesswork. Reports on issues in China therefore should be taken with a huge grain of salt.
With that caveat, Bloomberg recently published an interesting story about unpaid mortgages in China that could have significant consequences akin to the subprime mortgage crisis in the U.S. that triggered the Great Recession. The real estate sector is one of the prime drivers of the Chinese economy, with construction projects and home sales being responsible for about a quarter of China’s gross domestic product, so anything that affects that sector is worthy of note.
Lately, the Chinese real estate segment has struggled in the face of a combination of issues. Developers have produced only about 60 percent of the homes they have presold to homebuyers, continuing COVID issues have caused a decline in demand for new projects, property prices in some areas have plunged, and some debt-ridden real estate developers have been unable to complete projects and have begun to default on their debts. Some homebuyers are now refusing to pay on their mortgages, either because developers have not completed the projects, or because the mortgages are for amounts greater than current property values in view of the recent decline in prices, or both. The numbers involved so far aren’t enormous, but the underlying issue is whether such a development is the first sign of a more significant trend.
China watchers are always carefully scrutinizing the meager available data about what is really happening in the world’s most populated country, and this will be an area that commands attention going forward. Our own painful experience from the 2007-2009 time period teaches what can happen when mortgages go unpaid, the real estate market craters, and what banks had considered to be assets turn out not to be assets at all. If that happens in a huge economy like China, it’s going to leave a mark on the world economy, too.