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China’s real estate crisis will hit provinces, inner cities as the economy transitions towards new areas

All eyes on China's economic trajectory

China, despite registering a GDP growth rate of 4.9 per cent for the third quarter this year, is continuing to struggle to resurrect its real estate sector. All eyes are now on Chinese real estate major Country Garden, which failed to make a repayment on its dollar-denominated offshore bonds. The Guangdong-based company with liabilities of about $200 billion along with $11 billion in dollar-denominated offshore bonds was due to make a $15.4 million coupon repayment this week.

A default by the real estate major will dampen sentiments even as Beijing posted higher than expected GDP growth. It is also set to impact the local governments. The debt levels of the Chinese local governments have been steadily increasing.

Real estate has been one of the most preferred modes of investment for the Chinese. China’s property market has been rising steadily till 2021.

“There is a lot of uncertainty among the people especially since many have been trapped in the property mess,” an analyst who lives in China told India Narrative.

Home loans in China amounted to $5.3 trillion at the end of June. This makes up 17 per cent of banks’ total loan books, Reuters reported.

While a section of foreign policy watchers and economists have opined that China is allowing its real estate majors to fail as it gradually turns its focus on new age economies such as renewables, electric vehicles among others, the transition could be painful for the local people and businesses.

“The fall in the real estate sector would not only impact the local governments and the banks but more importantly, people’s savings are getting eroded and that is a cause for concern,” the analyst added.

According to the South China Morning Post, Zhang Ming, deputy director of the Institute of Finance at the Chinese Academy of Social Sciences (CASS), in an event last month said that the collapse of Country Garden could put other large private developers in danger too.

“If developers continue to fail one after another, [the scale of] local government debt will definitely continue to expand,” he said.

Crisis in the Chinese real estate sector, which accounts for about 30 per cent of its GDP, started with the collapse of Evergrande Group in 2021.

The high real estate mortgage has also pushed up China’s overall household debt, something that is constraining consumption. The analyst also said that it is unlikely that Beijing will carve out any significant stimulus package.

Though China is expected to achieve its growth target of 5 per cent growth, analysts said that how Beijing plays its cards in the near future will determine the country’s economic trajectory.

The country’s GDP in the second quarter grew 6.3 per cent.

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