Chinese homeowners boycotting mortgages?

REAL ESTATE CHINA

IF CORRESPONDENT

Disgruntled property buyers in China adopted that as one of their slogans at a protest in June. But they went beyond placards and chanting in their outrage over unfinished homes. Many have already quit making mortgage payments, an extreme step in Purposefully China, where dissent is rarely defaulted accepted. home loans According to a young might amount couple who just relocated to to $145 Zhengzhou in central China, billion (£120 billion). But, according to some observers, it might be higher the developer withdrew from the project after receiving the down payment last year, which froze the project and their dreams. A woman, who wished to remain anonymous, added, "I had dreamt many times, the thrill of living in a new home, but now it all feels ludicrous." Another female homeowner in her late-20s from Zhengzhou is prepared to quit making mortgage payments: "I will begin the repayment when the project resumes," she added. Contrary to the US subprime mortgage crisis of 2007, when banks provided money to high-risk borrowers who later failed to repay, many home buyers in China are capable of paying but choose not to. A crowdsourced estimate on Github, where homeowners discuss their woes and choices, reveals that members have bought homes in about 320 projects in China. But no one knows how many stopped making mortgage payments.

S&P Global rating estimates indicate that the purposefully defaulted home loans might amount to $145 billion (£120 billion). But, according to some observers, it might be higher.

The uprising rattled the authorities, bringing attention to an already strained market in a faltering economy severely short on cash.

More concerningly, it has indicated a loss of faith in one of the cornerstones of the world's second-largest economy.

In a recent paper, the think tank Oxford Economics stated that "mortgage boycotts, driven by deteriorating attitude about property are a grave danger to the financial condition of the sector."

Why is China's real estate crisis significant? A third of China's economic production comes from the real estate industry. It comprises businesses that manufacture white goods for apartments, rental and brokerage services, housing, and companies that provide building supplies.

However, China's economy has been slowing down; in the most recent quarter, it expanded by just 0.4% over the same period in 2021. As a result, some economists predict that in 2022 will see no growth.

Beijing's zero-Covid approach is primarily to

blame for this; repeated lockdowns and ongoing restrictions have impacted incomes, which has thwarted savings and investments.

Because of the scale of China's economy, a disruption in a critical area, like real estate, can impact the international financial system.

According to experts, the current concern is contagious as banks won't lend if they think the industry is failing.

According to Ding Shuang, head of Standard Chartered's Greater China Economic Research, "it will all depend on the policy. This is governmentinflicted, unlike other countries where property booms burst due to the markets."

Thirty real estate firms have previously failed to make international debt payments. The most well-known victim was Evergrande, which missed payments on a $300 billion loan in 2021. If sales do not increase, other companies may follow, according to S&P.

As China experiences a demographic shift due to slower population growth and urbanization, demand for housing is also not increasing.

According to Julian Evans-Pritchard, a senior economist from Capital Economics specializing in China, "the basic issue is that we have reached a tipping point in the Chinese housing market."

Where did it begin? In China, real estate makes up over 70% of individual wealth, and property buyers frequently make upfront payments for unfinished construction.

According to Mr. Evans-Pritchard, these "presales" account for 70% to 80% of all new home sales in China, and developers want that cash since they utilize it to fund numerous projects simultaneously.

However, many young and middle-class Chinese are no longer investing in real estate due to a failing economy, job losses, salary cuts, and, more recently, the worry that developers may not finish projects.

REAL ESTATE CHINA

Developers depended on new revenue, and those recent sales are no longer occurring, which is part of the issue, according to Mr. EvansPritchard.

According to the financial organization ANZ, incomplete projects may account for loans totaling more than $220 billion. In addition, credit, a significant funding source during the boom years, has also dried up.

The "three red lines" are accounting standards China's government implemented in 2020 to restrict how much developers might borrow. Banks' readiness to lend to real estate companies has also declined due to the funding cutoff and the subsequent loss of market confidence.

What is the government doing? One way Beijing is stabilizing the situation is by placing the responsibility on local governments; they are providing reduced down payments, tax breaks, cash subsidies to homebuyers, and relief funds to developers. However, the local economy will suffer due to a lack of land purchased by real estate developers. Therefore, this comes at a price.

The time, according to Mr. Ding, "is right for the central government and regulators to move in." "It will eventually intervene to ringfence some corporations' issues. The industry is too crucial to the economy."

According to recent reports from The Financial Times and Bloomberg, mortgage holders may be allowed a payment holiday without negatively affecting their credit score. Moreover, China recently provided $148 billion in loans to support real estate developers.

However, Oxford Economics recently stated that while any government intervention in real estate and infrastructure may boost growth in the short term, it is "not ideal for China's longer-term growth." It is because it "forces the government and the financial sector to support an unproductive (and failing) real estate industry."

Additionally, this goes beyond a financial crisis. Mr. Ding warned that the boycott of mortgages could become a significant social problem.

And it could cause issues for President Xi Jinping as he starts his third term as the Country's supreme leader.

What will follow? Analysts believe the reported $148 billion bailout may not be sufficient. According to Capital Economics, businesses need $444 billion to finish the stalled projects.

Furthermore, it's unclear whether banks, particularly smaller ones in rural areas, can afford the price tag of the mortgage strike.

Even if development picks back up, many developers might not make it because house sales might not boost confidence. The China Real Estate Information Corp (CRIC) estimates that the revenue of China's top 100 developers fell by 39.7% in July 2022 compared to 2021.

The Chinese economy is at a crossroads, and this crisis is the clearest sign of impending trouble.

The government is making every effort to find new sources of growth. Still, it won't be easy given how heavily the economy has relied on exports, infrastructure investment, and real estate over the past three decades, according to Mr. EvansPritchard. "The period of very high expansion in China is gone now... and this is most evident in the housing industry," he added.

What does it mean for the world? Real estate developers all around China are in a desperate position and trying everything in their power to sell houses, even accepting down payments from farmers in the form of wheat, garlic, watermelons, and peaches.

A problem that began with the Evergrande Group is now threatening to engulf some of the largest developers in the nation, its lenders, and a middle class with substantial wealth invested in the real estate market.

According to Pantheon Macroeconomics, property accounts for around 70% of the nation's household wealth, 30% to 40% of bank loan books, and 30% to 40% of local government revenue from land sales.

The National Bureau of Economic Research working paper estimated that from 2020, China's real estate industry generated $4 trillion out of the $14 trillion in GDP, or 29% of the total.

Evergrande is a troubled organization. Many debt-ridden real estate companies, including Fantasia Holdings, Sinic Holdings Group, and Modern Land, have defaulted or are about to do so.

Sunco, the third-largest developer in China, Sunac, has also seen a significant reduction in credit ratings as concerns about loan repayment mount.

Triple-red lines The "three red lines" are a set of regulations that Chinese regulators adopted in August 2020 to regulate the highly leveraged sector better and restrict real estate companies' borrowing. Developers are required to adhere to the following three red lines: A debt-to-asset ratio of 70% or below, enough cash on hand to cover short-term borrowing, debts, and liabilities, and a ceiling of 100% on net debt to equity.

Each red line decreased a company's capacity to take on more debt. As a result, a company that crosses these lines can no longer take on debt.

To comply with the "three red lines," companies were adopting various strategies to move loans and projects off the balance sheet or pass off debt as equity, according to a Reuters report.

China's local government debt was $4 trillion as of 2020. According to Goldman Sachs Global impact, more than half the nation's GDP, or $8 trillion, is thought to be held in "shadow" or "hidden" debt.

Because of China's sinking real estate market, alarm bells are going out worldwide. However, it remains the global center for manufacturing, so if its economy deteriorates, exports from other nations will be slower and more expensive.

Due to supply bottlenecks caused by Covid, several industries like the auto, consumer electronics, and others have already seen a slowdown. China is a global leader in contract electronics and semiconductor production. In the event of an economic downturn, this would only increase.

China is also the developing world's primary global creditor. So if China falls, developing nations depending on China for infrastructural projects would be hard hit.

The Belt and Road Initiative includes many projects the Xi government has funded. However, B&RI projects worth over $1 trillion in 139 different nations, including construction sites, roads, power plants, and other infrastructure projects, might also be left incomplete.

editor@ifinancemag.com

INDUSTRY FEATURE ENERGY ELECTRICITY SOUTH AFRICA POWER OUTAGE

South Africans are struggling in the dark to cope with increased power cuts that have hit households and businesses across the country. The rolling power cuts have been experienced for years, but in 2022 the country's state-owned power utility, Eskom, extended them so that some residents and businesses have gone without power for more than nine hours a day.

According to experts, a strike by Eskom workers added to the utility's woes including breakdowns of its aging coal-fired power plants, insufficient generation capacity and corruption.

The prolonged power cuts are hitting South Africans in the winter months of

ELECTRICITY

the Southern Hemisphere when many households rely on electricity for heat, light and cooking.

Small and large businesses have had to close down for prolonged periods or spend large amounts on diesel fuel to operate generators. Anger and frustration is widespread among business owners and customers at the power cuts, which Eskom calls load shedding.

The power blackouts are here to stay, say, experts, who warn it will take years to substantially increase South Africa's capacity to generate power. South Africa mines coal and relies heavily on coal-fired plants, which causes noticeable air pollution.

The country is looking to increase power production from solar and other renewable sources. Hilton Trollip an energy expert said, "The big picture is that we were at least expecting (heavy power cuts) this winter". "Eskom told us at the end of last year that

INDUSTRY FEATURE ENERGY ELECTRICITY SOUTH AFRICA POWER OUTAGE

there was a chronic power shortage... What that means is that until we have a substantial amount of extra generation on the grid, we will continue to be at the risk of load-shedding at any stage. The question then is how bad will the loadshedding be?," he added.

He lamented the impact of the blackouts on the economy. The power cuts are costing South Africa well over $40 million per day and deterring investment, say, economists. South Africa's economy, Africa's most developed, is already in recession and is suffering a 35% unemployment rate.

Buhle Ndlovu, a teacher at a nursery school in Soweto, Johannesburg's largest township, said the power cuts increased her costs to run the school. "We cater to about 40 children here. We need to feed healthy meals to them daily. At the rate we charge we can't afford to take on additional costs to buy gas in order for us to cook. Loadshedding has really made it difficult for us", Ndlovu said. She said it is a challenge to take care of children by candlelight until parents come to pick up their kids well after dark.

Eskom chief executive Andre de Ruyter said at a press conference that the crisis was receiving serious attention and that he had personally briefed President Cyril Ramaphosa about what the company is doing to keep the lights on.

Load shedding will affect either all or part of a grid – and there has been some debate about whether electricity is rationed on an equitable basis, with evidence to suggest that load shedding is unevenly allocated.

One study, for instance, found that in Karnataka, India, rural and nonurban feeders experience more load shedding than urban feeders serving cities like Bangalore, the state capital. And even within the same city, different groups may be rationed different amounts of power for political, ethical or commercial reasons. For example, utilities may provide higher service levels to feeders serving embassies, hospitals, and districts with a high number of commercial and industrial establishments. There may also be areas that receive better service due to political connections or bribes.

A team from the University of California, Berkeley, is studying different feeder lines with different levels of priority in Accra, Ghana, as part of the Energy and Economic Growthfunded GridWatch project. The team has identified priority feeders designated as ‘Exempted Essential Feeders’ that have experienced significantly less load shedding than other feeders. For example, in 2015, some customers experienced an average of 120 hours of load shedding per month, while others experienced an average of only 19 hours per month, depending on the feeder they were connected to.

In 2021 Ramaphosa offered an action plan to develop additional power generation capacity in the short to medium term. The government announced eight successful bidders for gas, wind and solar projects under the 2,000 megawatt Risk Mitigation Independent Power Producer Procurement Programme. In theory, bidders are required to be able to generate electricity by August 2022. But given that solar and wind farms typically take two years to become operational, the stipulated roll-out time is too short. Most of these projects will only be supplying the grid in 2023.

The Renewable Energy Independent Power Producer Procurement Programme is a mechanism initiated 10 years ago under which private developers competitively bid for the rights to construct new electricity generating plants and then sell the electricity to Eskom at predetermined rates.

The programme successfully established South Africa’s renewable energy sector through three bid windows. But it stalled after 2015 when these new technologies began to threaten the interests of politically wellconnected interest groups in the coal and nuclear sectors. Projects for a fourth bid window finally received clearance in 2018 following the departure of former president Jacob Zuma, but enthusiasm for renewables has waned again under the current Minister of Mineral Resources, Gwede Mantashe.

ELECTRICITY

The long-awaited fifth round has just been announced after inexplicable delays. Prospective solar and wind farm developers have until August 2021 to submit bids for projects generating in total 1,600 MW of wind and 1,000 MW of solar capacity.

The successful bidders may be announced before the end of the year but will need to demonstrate financial closure before starting to construct facilities. Renewable builds typically take about two years to complete. This means the round five projects are likely to come into operation only in 2024. That is two years later than set out by the 2019 national electricity plan.

The 2,600 MW added to the system in round five are with intermittent technologies. They only function when the sun is shining or the wind is blowing. They will therefore only be adding, on power contributions to South Africa’s electricity will remain below 10% of the national total for several more years. Renewables won’t make a decisive impact to alleviate the country’s power shortage for at least five years.

In addition to the emergency and new renewable rounds, Minister Mantashe has also announced that procurement for 1,500 MW of new coal plants and 3,000 MW of gas plants will begin soon.

In view of their role in global warming, sentiment against new coal plants is now so strong that investment in such projects is extremely unlikely. Nuclear plants are not seen favourably globally either because of their high building costs and a reputation for severe construction delays. Gas is viewed as more attractive, but is an expensive energy source that is mainly envisaged as a backup for emergency situations. None of these technologies offer rapid solutions.

It’s not expected that sufficient alternative power sources will be operational until about 2026. Power cuts look set to stay for the coming years.

On the positive side, this is likely to act as a catalyst for growth in small to medium-scale solar installations. These may take the form of domestic rooftop installations or even mini-power plants on the roofs of shopping malls or adjacent to mines and industrial plants. Municipalities will also soon be able to set up their local power generation facilities. So some may escape the power cuts earlier – but investment in such solutions is only for those who can afford it.

average, slightly under 1,000 MW. That is too little to overcome the existing power deficit.

The last (2019) installment of the South African Integrated Resource Plan for Electricity envisaged between 1,600 MW and 2,600 MW of renewable capacity added to the grid almost every year from 2022 to 2030. With the existing delay, the process to effect upcoming annual additions must be accelerated.

But an early catch-up is unlikely, because the minister only committed to one further renewables round, of the same scale, “within the next 12 months”. It’s therefore expected that future rounds will only happen annually, with no more than 2,600 MW being rolled out each time.

At that rate, the wind and solar editor@ifinancemag.com