While many trade experts predict the U.S.-China trade war will weigh heavily on Beijing and negatively impact the country’s export sectors, a more serious threat is facing the Asian nation — its property market. In fact, the trade war could end up worsening the country’s real estate market at a time when it is already dealing with excess debt and starting to form a bubble.
The crisis in the property market
As per various reports, two-thirds of household assets in China are held in the real estate sector. The industry saw property prices rise up in recent months, with experts predicting that another real estate bubble is developing. Things could get riskier over the coming months as developers start to feel a cash squeeze.
Bloomberg estimates a 0.87 percent average probability that Chinese builders will start defaulting on their loan payments over the next 12 months. The Chinese builders are expected to pay about US$90 billion in debt payments for the year 2019. Unfortunately, the poor cash flow situation means that a large number of builders will simply be unable to repay the money they owe.
“Investors need to pay attention to the fundamentals of issuers that have lots of debt maturing. They should also watch out for builders that have rising short-term debt and worsening liquidity,” Li Shi, from the China Chengxin International Credit Rating Co.. said in an interview with Bloomberg.
According to the head of Beijing’s state planning agency, China’s economy is set to face some serious economic dangers in the second half of 2018.
“Targets in economic growth, employment, inflation, and exports and imports can be achieved through effort,” Reuters quotes He Lifeng, Chairman of the National Development and Reform Commission (NDRC), who also added: “To achieve growth goals in consumption, outstanding total social financing, and urban disposable income will require bigger effort.”
Beijing has been trying to restrict its real estate sector from raising large amounts of funds, ending up in severe debt, and potentially crippling the economy. To this effect, they have passed certain policies that have led to the drying up of funds available for real estate businesses.
“Developers’ funding conditions remain tight, not only because of stricter regulation, but also because of the increase in financing costs and weakened investor sentiment,” South China Morning Post quotes Franco Leung from Moody’s.
This essentially would have resulted in a slowdown in the real estate market. The Chinese government was willing to take such a risk in a bid to keep property companies from taking on too much debt. However, China’s current trade war with the U.S. seems to be derailing Beijing’s plan to keep the real estate market in check.
Since the trade war has already started to negatively affect the export sector, export businesses will be facing a tough time in the coming months. In such a situation, Beijing cannot risk restricting its real estate sector and dampening the employment outlook of the economy.
As a consequence, Beijing might end up loosening the restrictions it had placed on raising funds in the property market, pushing the real estate industry into more debt. And this is Beijing’s conundrum — the Chinese government will essentially be caught between its need to control the property market and the need to keep its domestic economy growing.
This gives the U.S. a tremendous advantage when negotiating with China. And if America plays their cards well, they should be able to force Beijing to agree to their demands and end the trade war in their favor.