Since the CCP made the decision to put the brakes on the real estate sector, the writing was on the wall. Chinese banks were doomed. Real estate accounts for nearly 20% of China's GDP, not entirely surprising since Chinese people need to invest their excess income somewhere, and since foreign markets are closed off, it leaves Chinese savers with few outlets: Government debt, Corporate debt, the stock market and housing. The easiest and until about 5 years ago was the housing market. Friends would get together and purchase properties, these were seen as a savings tool with a better return.
The problem was that for Chinese people the idea was never to invest in productive assets, it was a store of value, therefore the apartments were left empty and often unfinished to reduce tax liability. Most Chinese savers (like Americans before them in the 1980s and before 2008) used leverage to increase "performance".
The impact was that Americans were buying homes, and leasing them or living in them, they relied on income (or their revenues) to pay the mortgages. The Chinese never did this, the mortgage payment was always just adding to your savings.
The difference between the two markets has created a monster oversupply of empty and unfinished apartments all over China. The problem is that many "investors" realized over the past four years that their investment (aka the empty and unfished apartments) were not worth anything, especially after they tried to sell them in the secondary market, and they found out that the "quality" of finish was questionable. Their reaction was to stop paying their mortgages. (the first hit on the banks)
Builders were the first to feel the pain as they were sitting on massive landbanks, tons of unfished inventory and a massive drop in demand. Prices of new apartments in Shanghai are down for the past three years. It doesn't matter because every single real estate company has now either been shut down or is on life support from the government. (the second hit on the banks)
The first banks to hit the wall are the regional ones, there are thousands of them (according to some number, somewhere around 4,000). The government's solution has so far been to merge them into bigger banks, still in deep trouble.
The problem is the size of the debt burden. About 600 billion dollars of the secondary banks' debt must be refinanced this year. The only solution is a guarantee from the central bank. There lies the problem, because it's not only the banks which are bust, it's the provincial governments.
Think of the 2008 problem and multiply it by five and you get a sense of the Chinese real estate problem. The one good aspect of this, and it's not that great, is that since the Chinese currency is not freely exchangeable and that foreigners have been kept out of the stock market, the impact outside of China is negligible.
The Chinese government will have no choice but to monetize the debt and face the consequence of massive inflation. At the same time, the world is reacting to the Chinese habit of trying to export its way out of domestic trouble. The one country that cannot impose tariffs is China, virtually everything it imports is raw materials.
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