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The Long March continues for China's developers.

The nation's already-battered housing market is taking another hit from wait-and-see buyers, The Wall Street Journal reported this weekend. Prospective purchasers have the money, but they think prices will fall even further, leaving developers with cash-flow problems and the government with major concerns.

Three Red Lines

China's lengthy real-estate slowdown started with the "three red lines" policy in 2020, when Beijing passed strict regulations with the aim of lowering property developers' debts, reducing financial risk, and making housing more affordable. Sadly, the moves did the opposite as new borrowing was severely limited, developers defaulted on a record number of debts, and buyers hesitated to buy technically cheaper houses in a market that looked even more grim.

Even the sector's biggest player isn't safe. Country Garden -- once the ideal developer in China -- recently missed $22.5 million in interest payments on two US dollar bonds and expects to default. Last week, the company warned that it likely suffered a record loss of $7.6 billion in the first half of this year, and its stock value has dropped nearly 60% this year.

Some easing of the three red lines policy brought about a slight uptick in property sales and prices at the start of 2023, but that surge was brief, and developers and authorities are doing all they can to attract new buyers or risk further defaults:

  • Property developers are offering perks like free parking and household appliances, but buyers are now accustomed to those bonuses, so when they're not offered, sales go down.
  • Multiple cities have begun offering "cash subsidies and tax rebates on home purchases, raising limits on how much home buyers can borrow from banks, and removing restrictions on additional home purchases," the WSJ reported.

"[Clients] told me that the current price is unstable, and you don't know whether it will rise or fall," Wang Tao told the WSJ. "So they would rather remain still to cope with a changing environment."

A Lot More Problems: In addition to the housing crisis, China's slow pandemic recovery has also led to deflation, high unemployment among young adults, and lackluster exports, all of which are contributing to what President Joe Biden called a "ticking time bomb" this past weekend. Some believe China's economy is on the verge of an era similar to Japan's Lost Decades with stagnated growth and wages. In July, Desmond Lachman of the American Enterprise Institute told Reuters "It is unlikely that the Chinese economy will surpass that of the United States within the next decade or two," adding that he expects growth to slow to 3% annually, which "will feel like an economic recession" to the rest of the world.