Original by Dr. Steve Wong
August 22, 2023
Since China’s opening up and economic reform, the upward trajectory of property prices experienced a significant downturn in 2022, following a 40-year trend. Previously, real estate was widely regarded as the most favorable investment option. However, concerns have arisen as the number of vacant houses in mainland China has surpassed 200 million, far exceeding demand and population growth. The absorption of this surplus property has become a pressing issue.
Traditionally, Chinese individuals have been relatively conservative in their spending habits, prioritizing saving for the future. Following the reform and opening up, people began investing their savings in real estate to secure retirement and seek capital appreciation through a safe investment. Developers capitalized on this trend, purchasing high-priced land and constructing houses for presale. They obtained funds from banks and the financial market and even resorted to borrowing from finance companies and private funds at high-interest rates. Local governments strongly supported this booming industry as real estate projects contributed to tax revenue and supported the economy and employment. The impact of this thriving sector extended to various fields, including the plastics market, which experienced effects on materials such as recycled HDPE for pipes, PVB for laminated glass, nylon for insulation strips, and other plastics used in furniture, appliances, and bedding.
Despite the hopes of local governments, businesses, and house buyers to avoid market downturns or bubble bursts, the reality of the market prevails. Houses are primarily meant for living, not speculative transactions. Since President Xi Jinping assumed office, the government has been dedicated to rectifying the unhealthy real estate market. From the case of Evergrande to the more recent Country Garden, the government has chosen not to intervene and rescue these companies. The sheer scale, complexity, and profound impact of this issue on the financial sector have even affected the stock markets of Hong Kong and mainland China. Many citizens feel they need more certainty about the future, leading to decreased spending. Mainland China has yet to achieve the desired results despite introducing various policies to stimulate the economy.
Currently, mainland China’s real estate market is grappling with the challenge of oversupply, which may take several years to rectify and balance supply and demand. Similarly, other commodities and plastic raw materials are also facing overcapacity issues. Experts estimate that China’s plastic raw materials market may not achieve a supply-demand balance until 2029. China’s infrastructure also suffers from overbuilding and excessive unused capacity, with the Hong Kong-Zhuhai-Macao Bridge as an example. Foreign observers find this situation perplexing as China’s future development shifts towards industries such as technology, real estate and infrastructure may no longer be the primary focus for stimulating the economy.