Chinese social media censored a top economist for his bearish predictions. He now warns that China’s property crisis will take a decade to fix

Nicholas Gordon
Tue, September 26, 2023 

Graham Crouch—Bloomberg via Getty Images

How long will it take to fix China’s flailing real estate sector? One of the country’s most prominent economists, who was ejected from its social media platforms for his bearish predictions about the economy, thinks it might take 10 years to fix.

“Fixing the property sector may be a multiyear or even a decade’s work in front of us,” Hong Hao, chief economist for Shanghai-based hedge fund Grow Investment, said on CNBC Tuesday.

That will mean more pain for China’s suffering real estate sector, now two years into its debt crisis. A default in 2021 by China Evergrande Group, one of the country’s largest private developers, sparked contagion across the whole sector as financing dried up. Construction stopped, leading to protests as homebuyers realized they might never get the homes they paid for.

Now with China’s economy underperforming after the COVID pandemic, Beijing officials are grappling with how to wean the economy from real estate without torpedoing the economy in the short term.

For much of the past decade, Chinese developers like Evergrande went on a debt-fueled construction spree, building millions of new homes throughout the country. That’s led to an oversupply, dragging down prices.

“We built way too much housing for Chinese people,” Hong said on CNBC.

Demand is also in long-term decline. Investment bank Goldman Sachs estimated in August that China’s annual urban housing demand peaked at 18 million units in 2017, and will fall to 11 million units this year and 9 million units by 2030.

On Tuesday, Hong pointed to slowing rates of urbanization, with fewer rural Chinese moving to the cities for work. "Two years ago, we were selling 18 trillion yuan [$2.5 trillion] worth of property," he said. "This year, we'd be lucky to do even [10 trillion yuan], and going down the road, we'd be lucky to do even [5 trillion] or [6 trillion]."

Bearish takes

Hong is an outspoken commentator on China’s economy, growing his audience during his tenure as the head of research of BOCOM International, a division of state-owned Bank of Communications.

Yet Hong’s takes were censored last year amid China’s tough COVID lockdowns in cities like Shanghai. Hong argued that the lockdown, which trapped millions of people to their apartments in a bid to stop an outbreak, would hurt China’s economy and would encourage capital flight.

Both WeChat—the ubiquitous messaging platform—and Twitter-like Weibo suspended Hong’s accounts in May 2022. Hong soon resigned from BOCOM, which the company said was for personal reasons.

When Hong got a new gig at Grow International a few months later, he warned that those working at state-owned brokerages were starting to face restrictions about what they could say. “Even if you don’t speak the truth, market prices will tell the truth,” he told Reuters at the time.

Hong’s suspension was an early indicator of Beijing’s censorship of bad economic news. This year, regulators are asking analysts and economists to stop using negative language to describe China’s economy—think “subdued inflation” rather than deflation—and the statistics bureau has stopped releasing some indicators like consumer confidence and youth unemployment.

China’s economic recovery has stagnated. Retail sales and manufacturing have grown at lower-than-expected rates for much of the year, and foreign trade has plunged. Still, Chinese economic data beat forecasts last month, suggesting that government support measures may finally be having an effect.

China’s property crisis

China’s real estate sector contributes as much as a third of the country’s GDP. Yet the sector’s liquidity crisis shows no signs of ending anytime soon.

China Evergrande, whose default arguably triggered the crisis in the first place, missed a payment on an onshore yuan-denominated bond on Monday. The developer revealed over the weekend that it could not issue new debt. Chinese authorities are also probing the developer’s former CEO and CFO, reports Caixin.

The bankrupt developer faces a liquidation petition on Oct. 30.

Another major Chinese developer, Country Garden, is also having debt issues. The developer, which has four times as many projects as Evergrande, recently made a $22.5 million interest payment with just days to spare.

While China has relaxed some real estate policies in a bid to stabilize home prices, analysts think that the glory days of the sector are over.

That may be by design, as officials try to wean China off its real estate sector. On CNBC, Hong suggested that once China’s economy relies on other industries rather than the property sector, then “we will have a better, much healthier Chinese economy than before.”

“Not having an overbearing Chinese property sector actually is good for the Chinese economy going forward,” he said.

Fortune.com