Source: The Business Times —
SINCE the global financial crisis in 2008, the real estate sector has emerged as one of the most important engines of growth in China’s economy, contributing more than even external exports. A huge investment binge in infrastructure and real estate resulted in a policy push away from external product demand.
Housing prices consequently shot up at the speed of light. China’s well-known high savings ratio, together with capital controls, have been instrumental in channeling funds to finance the real estate bubble.
Chinese households invested up to 80 percent of their wealth into real estate, and many bought several property units, depending on their ability to do so.
As a result, Chinese real estate developers became the largest in the world – that is, until the bubble ended abruptly some 18 months ago.
This decade-long real estate boom had several consequences.
First and foremost, it contributed as much as one third of the growth in fixed asset investment and GDP (gross domestic product) growth in China between 2010 and 2019.
Second, it provided large amounts of cash to Chinese local governments through the sales of land to developers. This meant that they could fund many other projects such as international acquisitions of technological parks through their local champions.
Finally, as the price of land continued to increase and real estate developers were cut from bank financing in an attempt to rein in their increasing leverage, they had to find creative ways to finance themselves.
This, together with local governments’ own need to finance infrastructure projects, led to the rapid emergence of China’s shadow banking.
