The country has survived similar crises before
The Chinese property market is in crisis, again, less than a year out from the country’s last. In late 2021, Evergrande, China’s second largest property developer, missed payments on its loans. Yet, the following quarter China logged a healthy annual growth rate of 4.8% in GDP.
It is true that the recent crisis looks more far-reaching. After all, Evergrande was just one company, albeit a rather large one. But the current crisis has the issuance of residential mortgage-backed securities (RMBS) falling by 92%. A crash in RMBS issuance suggests a major contraction in the number of mortgages being issued and has grim echoes of the MBS markets seizing up in Western countries in 2007-08.
Yet, this too is not without recent precedent. In 2014-2015 RMBS issuance was at roughly the same levels that we see today. The impact on the housing market was far larger than Evergrande: new home construction fell by just over 5% and inflation-adjusted house prices plummeted by a historic rate of -7.3% in the second quarter of 2015. Most people working in markets at the time thought that the Chinese housing market — and with it the Chinese economy — was toast.
Such an analysis was perfectly reasonable. After all, China’s property market accounts for anywhere between 18% and 30% of GDP. And it is rare for a market to take the sort of hit that China’s did in 2014-15 and then immediately bounce back. But bounce back it did. In the first quarter 2016, inflation-adjusted prices started to grow again and by the fourth quarter of the same year they were steaming ahead at around +7.1% annual growth. Newly built homes duly responded to the rising prices and by 2017 they were growing by over 12% per year.
The point is that China has beaten its doubters before. Last time we saw the RMBS market collapse in China in 2014-15, the lull did not last long. The reason for this appears to be that China’s real estate sector is largely controlled by the government. Whether through direct government contract issuance or through pressure on Chinese Communist Party (CCP) connected businessmen, the Chinese state appears to be able to dictate the terms of investment.
China also appears to have a debt system immune from widespread default. During the Asian Tigers crisis in the late-1990s, the Chinese government set up so-called Asset Management Companies (AMCs) whose job it is to take bad debt onto their books and, with the help of the money-creating powers of the Chinese central bank, make them disappear. Lately these AMCs have been stuffed full of bad property debt and while there are reports that they are bulging at the seams that are way beyond capacity, there is nothing to stop the government from simply creating more.
The fact of the matter is that the Chinese economy is a hybrid, not a purely market-driven economy. Consumer goods are distributed in the same manner as we see in Western market economies, but the pace of investment and the finance system is controlled by the government. For this reason, indicators that warn of disaster in market economies fail when applied to China’s partially planned economy. This is not to say that the Chinese state will not slip up and create a recession. It might. But it would be a failure of policy on the part of the Chinese, not a purely market-driven collapse of the sort we are used to in the West.