God is watching above!
China has 700 million square meters and more of real estate in stock that looks hard to be consumed by its potential buyers. China’s property giants have claimed that they would rather bomb off their apartment buildings than sell them at reduced prices!
The Central Economic Work Conference months ago has stressed that the national housing prices should drop somewhat, encouraging rural farmers to buy property in cities, and even promising to give out remedies to urban residents and businesses to buy apartments for rent.
Beijing wants a more active fiscal policy to support economic growth but Central government’s policies are very month changing, in the form of strategic adjustments. The local governments are the same greedy as those key developers, rendering the property market into a total fraud of Ponzi scheme.
Their purpose is to cheat you citizens, trying hard with all means to lure innocent investors for their own profits. Almost all developers in China borrow from Bank-west to pay Bank-east, rob Peter to pay Paul. Their debt has all piled up into mountain height; they are creating more false impressions in order to gain more investment by cheating.
China’s property market has been formed into a complex toxic structure. On the one hand, there is truly a demand in provincial cities, but the high price there has far exceeded the purchasing power of the local residents. People in Beijing, Shanghai, Guangzhou, and Shenzhen have to spend their total earnings of 25-30 years to pay for a two bedroom apartment. In small and medium sized cities, prices look reasonable, but there is a more severe crisis there: over supply of houses everywhere, new buyers hard to find. People just don’t have the money to buy; that is the truth.
Why don’t they lower the prices so that more people can afford? Many investors never use their own earnings to buy property; they work in a fraud of leverage with the banks and make money out of the loans. Before a developer announces an offering of sales (internal pre-sale), their apartments have all be sold to copies of ID cards. If the prices keep on rising, valued more than the interest paid, they re-mortgage the apartments and take out more loans. This way, they never sell out the apartments, but prices truly rise every year. On their sheets, the banks make money, and seem safe too as secured with sufficient assets of housing; the local governments are happy, making more money; and the land value is also positively estimated.
Banks cooperate with developers in this kind of games, each making their profits and saving them into their own pockets. But the ordinary people are suffering: they have to pay for higher prices for a residence, lured again to buy those so-called financial products as investment. Basically this is a toxic Ponzi fraud: the game can be played over and over only when the increase of price exceed the interest paid for loans.
Ordinary Chinese citizens never have a say when the power or interest groups make policies for allocation of market resources or encouraging more frauds.
The ordinary Chinese call the government’s policy schemes as “cutting leeks” or “sheep shearing”. The stock market is one of them; and this property market is another.
But one day when drought, there will be no more idiots to fool around; the alliance between the banks and the developers collapses, game over. Loans become bad debts; the banks have to tighten their necks, and thus more and more developers are going to hell.
Economists have long predicted that China’s housing bubble will soon burst. But a collapse of the property market would devastate the entire country. Maybe now is the time, a critical point for a burst.
We give an example.
Simon Zhang (We hide his real name in Chinese) is a developer. He worked hard for some years, with a few friends, to build an apartment building, Grandview Garden. He has been dreaming of making a huge profit with this project. But when his friends came for their portion of profits, they found out Simon had no profits at all to share but a huge sum of debt from the creditors, nearly one billion US dollars. At peak time last year, he might have sold the project for a quarter of a billion, but now a much lesser amount.
He only borrowed half a billion from the banks, the other half interest to be paid. His story has a more evil part: the garden was mostly completed two years ago; because of his greed, he delayed the public offering for sale, waiting for a better price. The fact was that last year he was dead broke, or close to bankruptcy. He gambled with his fate and wished for a boom up. But that never happened. Reality is cruel. Price increase is behind the interest; he has no way out.
The worst part of all, he had dragged all his family members, relatives, classmates, and friends down under water. Coming to his office for pay-me-backs are either his friends or former best partners. One of them is a bank manager who gave him the best loans. Now the loans cannot be recovered, this friend has been removed from his management post and become a special debt collector. The number of relatives and friends is in the hundreds, some a million dollars or two, some several hundred thousand, all trapped in this project game; whether it is a social gathering or a telephone communication, only complaints and quarrels tie their relationship.
Simon has the heart to die and many of these friends want to tear him into pieces. But even if he could cut himself in a million pieces, he could never repay the debts.
This reveals the common phenomena in the country, especially in these provinces Guangdong, Sichuan, Zhejiang and Jiangsu where many people have become bankrupt using leverage in the property game with the so-called private loans or rural finance. They are all Ponzi frauds: small amount credit, financial products, wealth management schemes, peer-to-peer loans; either the developers or general public know anything about financial knowhow or the management of risks. Their eyes only look into the promised rates: 20% return, or even 40-50% return. In the end, no one keeps his promises.
This kind of frauds comes into several forms. One may have a story telling that he has a mine somewhere in the remote mountains of Xinjiang or Inner Mongolia regions; one may have a story of a piece of land from the local government for high tech development; one may has another story of keeping a ancient picture or relic of historical significance. One may just open a website, calling it a P2P platform or wealth creation platform that has the potential to bring huge amount of earnings in a short-time by big data or internet technology. Some people started with a mission to build a great business, and soon began his measures to lure others into his fraudulent schemes. They started with friends, relatives, fellow villagers, giving some high returns of real money to a few investors and spreading their investment projects city-wide or even nationwide. Suddenly they cut connection and run away with huge amount of cash.
Don’t think the evils are only done by individuals.
In 2008, the Central government released a 4 trillion yuan loan scheme to boost investment. This was the first time bank managers across the country were begging enterprises and individuals to give them money. Borrowers could easily get a loan with a piece of paper without a true mortgage.
One year later, the central bank wanted to tighten the loans a bit after seeing some increase in the economy. The share market responded with a peak. When people was awakened to this and wanted more money, there was no longer the opportunity. The bag is closed and the central bank exercised a control on total volume. By the end of 2010, all quota were used, and the banks had no money to lend.
With the 4 trillion, local governments released another 18 trillion for infrastructure. When the central government tightened lending, construction of many projects already started, they could not be stopped half way. Otherwise, huge waste is inevitable.
The central government thus thought of other solutions. It gave loans to state-owned large projects only, cheap loans. Private and small businesses no longer got a bite. Instead, the government allowed private loans between businesses and individuals, calling it “luring the snakes out of holes”. Thus we witnessed a nationwide, most active and exciting feast of “underground banking” that has never seen since establishment of the Republic.
Thus we see the property boom. 4 trillion plus 18 trillion plus private underground investment, and we must attribute the creation of property bubble to increased value of the yuan and the push of local governments.
Infrastructure and real estate are double tracks going forward side by side. They work together to give a “stable economic increase.” But these projects consume huge amount of investment and once they collapse, the banks must bear most of the risks, posing severe challenges to social stability.
China’s banking system structures itself into two sectors: internally, it conforms to central administration, with directions from the central bank; externally the commercial banks have their own channels, to set their own rates, to offer investment products, or give credit to the private sectors.
As a result, private debt by credit amounted to 10 trillion yuan in just a few years. These credits went into real estate, mining, p2p and other investment platforms. Leading the boom is still state-owned enterprises; individuals and private businesses only form a small part, acting like hungry dogs getting some bites from the mouths of wolves.
But most people don’t know where the money is from, and they don’t even have the mind to think a bit of it. Only the bankers know; they know the source of springs is the US, the American dollar.
Money from Wall Street is looking for ways out. Interest rates in the US and most of Europe are close to zero, and China has been their high land to invest. China’s national infrastructure needs sums of cash, and the Chinese are willing to pay for high rates, especially the developers and local governments.
Officials of the Chinese governments won’t care about the rates; they only care about their GDP that will promote them to higher posts. When their projects see no future of completion, they already leave the responsibilities to their successors. For developers, they all pay high prices to get a piece of land, including giving out brides to officials at all levels. They won’t be able to raise money from the stock market, and their assets have been used over and over for more loans from different banks. They don’t mind paying 40-50% rates to get a billion or two for another garden project, even though they know that many court cases of debt disputes are waiting for them along the way.
With the changes in global economic and political conditions, China’s central policies change. When the governments found out in 2012-2013 that this kind of economic boom was not sustainable, they encouraged its Chinese businesses to invest overseas. And along with that, the central government launched the belt and road initiative. Chinese investors also had the wish to fulfill their appetite for overseas real estate assets to protect their wealth.
But this round of foreign investment and economic expansion soon proved to be stupid and unsuccessful and was challenged by more and more countries. Chinese governments were met with many criticisms and protests both domestically and internationally.
When China tightened real estate policy in 2017, developers face difficulties in financing, and related industries all feel the squeeze from tightened liquidity.
Now China’s over heated real estate market remains a challenge for authorities trying to maintain stable economic growth in the face of escalating trade tensions with the US.
Manufacturing is going down in China. Many factories are moving out of the country and more and more people are losing their jobs.
When profit was thin within manufacturing, money in the industry turned to property. Now this source is also drought and unemployed people find it hard to pay for their mortgages. Property market must see a big crisis.
People are dropped into the clouds and mists as they see real estate prices surging in the last few months throughout China despite controls put in place to ward off a property bubble. Different cities in China may tell a different story. The highest asking price for a seaside apartment in Shenzhen stands at US$50 thousand per square meter, and in Guangzhou half the price. 1st, 2nd and 3rd tier of cities see a clear difference in price levels. But as a whole, the housing market has become a huge casino where everybody is involved gambling. This has become a huge headache for the Chinese authorities as they seem to have used up all their playing cards.
My friend Weida (We hide his name in Chinese) has become a victim in this gambling. 23 houses and apartments have been sealed by local courts as he went bankrupt last year. Lenders are still after him as he fled overseas.
There must be more people who are going to pay the price, who will take responsibilities for any wrong doing.
When a storm comes, few people would be aware of that. Many more developers would go bankrupt, many corrupt officials would face jail terms; more investors may lose their life time savings. Many people would die from those crazy happenings and devastating changes.
By Cloudy Seagail