Source: ForbesNothing is going right for Hangzhou at this moment. Walmart will be closing its Zhaohui store in that city on April 23 as a part of its overall plan to dump marginal locations—about 9% of the total—in China.
Thanks to the world’s largest retailer, another large block of space in Hangzhou, the capital of Zhejiang province, will go on the market at a time when there is generally too much supply. The problem is especially pronounced in the city’s premium office market. Hangzhou’s Grade A office buildings at the end of 2013 had, according to Jones Lang LaSalle, an average occupancy rate of 30%.
The real weakness, however, is Hangzhou’s residential sector. The cause is simple: massive overbuilding. Sara Hsu of the State University of New York at New Paltz writes that Hangzhou faces “burgeoning swaths of empty apartment units.”
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Official statistics do not seem consistent with the general trend of reports, but in any event severe problems are evidently ahead. The secondary property market has tumbled, with sales falling by more than half in Q1 2014 from the same quarter in 2013. Speculators have either left the domestic market or have sold off holdings. Rich Chinese, now interested in foreign holdings, are also shunning their home market. Foreigners, who own only an infinitesimal portion of China’s property but who are a bellwether nonetheless, are investing at the slowest pace in at least a decade. Middle class Chinese are also largely out of the market.
And that’s not all. China property trust sales plunged 49.1% in Q1 2014 from the previous quarter, from 99.7 billion yuan in Q4 2013 to 50.7 billion yuan. The precipitous fall was due in part to the failure last month of developer Zhejiang Xingrun Real Estate, which had 3.5 billion yuan of indebtedness.
Moreover, just about everyone expects more developers to close their doors. For one thing, the central bank is not injecting liquidity as fast as it once did. And interest rates are increasing, the reason why a Finance Ministry one-year bond auction failed on Friday. Many private developers had gambled that property prices would rise faster than interest rates, but that now looks like a losing bet. Zhejiang Xingrun, for one, became insolvent after it had borrowed at ultra high rates.
Here is another article with a few key points about this:
Source: The Wall Street JournalThe 200 or so Chinese cities with populations ranging from 500,000 to several million account for 70% of the country's residential-property sales. In many of these cities, developers are slashing prices and offering freebies such as kitchen furnishings and parking spaces as they try to work through vast gluts of unsold property. Protests are breaking out among buyers angry that their investments are losing value.
Data in some of these smaller cities is scarce. But in 100 cities tracked by Nomura Holdings Inc., 8604.TO +0.17% 42% of those classified as Tier 3 and Tier 4 saw housing prices decline in March from February. Home construction in such cities is racing well ahead of population growth, says Beijing research firm Gavekal Dragonomics, as developers continue to build new projects without buyers.
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The construction, sale and outfitting of apartments accounted for 23% of China's gross domestic product in 2013, Moody's MCO +1.79% Analytics calculates. That is up steeply from 10% in 2006 and is higher than American housing's share of GDP reached during the height of the U.S. housing boom in 2006, Moody's says.
The housing troubles add to other headaches for the world's second-largest economy. They come at a time when debt in China is climbing as rapidly as it was in the U.S., Europe, Japan and South Korea before their economies cratered in years past. And China's growth, while still healthy by world standards, has slowed to its weakest since the Asia financial crisis of the late 1990s, amid less-robust demand both at home and abroad for Chinese goods.
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The finances of some cities and developers are being affected. China's local governments depend on land sales to developers for about 40% of their revenue. Now those sales are bringing in less cash.
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As developers grow short of money, some are using apartments instead of cash to pay their bills to construction companies. Anne Stevenson-Yang, research director at J Capital Research in Beijing, who crisscrosses China checking out property developments, sums up the real-estate market in China's smaller cities "an incredible house of cards."
Further weakness could mean trouble for construction companies and appliance and commodity producers. Furniture and appliance sales in China have been slowing along with the weaker pace of apartment sales. Also potentially affected are businesses that use real estate as collateral to get new loans; China's banks rely on property holdings as the main collateral securing loans.
The much-feared Chinese recession seems to be looming ominously on the horizon. With all of the underlying economic weakness throughout the world, this one looks like it is gonna hurt.