China’s real estate sector and the impacts of its possible disorder on Chinese economy and the euro area

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Title: China’s real estate sector and the impacts of its possible disorder on Chinese economy and the euro area
Author: Kaaresvirta, Juuso ; Kerola, Eeva ; Nuutilainen, Riikka
Organization: Bank of Finland
Department / Unit: Bank of Finland Institute for Emerging Economies (BOFIT)
Series: BOFIT Policy Brief
Series number: 13/2021
Year of publication: 2021
Publication date: 16.12.2021
Pages: 16
Subject (yso): riskit; talouskasvu; kiinteistöt; talous; rakennusala; rakennuttajat; velkaantuminen; kriisit; vaikutukset; euroalue
Keywords: Bofit-kokoelma; Kiina; maksuvaikeudet; kiinteistösektori; Evergrande
Other keywords: China; risks; real estate sector; construction; economy; economic growth
Abstract: China’s real estate and construction sector has served as a major engine of economic growth in recent decades and the sector now plays an oversized role in the economy. Much of that growth has been debt-fuelled, with the indebtedness of developers climbing to unprecedented levels. After officials turned off the money spigot last year, housing markets cooled and a wave of financial difficulties washed over builders during autumn 2021. The entire sector found itself under heavy stress, and in December two major developers, Evergrande and Kaisa, defaulted on their offshore debt. In this brief, we consider the current conditions in China’s real estate and construction sector and how a possible sectoral crisis could spread to the national economy and the euro area. While the direct financial impacts on the euro area’s financial sector is likely to be minor, China’s real estate sector problems could spill over widely into the domestic real economy and thereby increase uncertainty internationally. In such case, the indirect impacts on the euro area could be severe.
Table of contents: Abstract ...... 3 1. Introduction...... 4 2. The importance of the real estate sector for China’s economy ...... 4 3. Restrictions on borrowing expose real estate sector woes...... 6 Box. The debt struggles of Evergrande and other developers ...... 7 4. The real estate sector’s problems could be reflected broadly in Chinese economic growth...... 10 5. Possible disorder in China’s real estate sector could also impact the euro area.....11 6. Conclusion ..... 14

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