1.) "The demand side is mostly people buying second and third units as investments." that is incorrect. Most purchases are from couples that want to get married, and a home purchase is a required dowry from men that they need in order to get approved for marriage from the parents

2.) Yes, just google empty kindegardens in China. Also, marriages dropped to the lowest since records began in 1986. https://www.theguardian.com/world/2023/jun/14/marriages-in-c...

3.) Nope. China’s government land sales revenue declined for the 19th consecutive month in July. Land sales fell 10.1% from a year earlier in July, after declining 24.3% the previous month https://www.reuters.com/article/china-economy-landsales/chin...

The Chinese local governments' bonds alone total at about $2 trillion, and any defaults would rock the Asian nation's $60 trillion financial system, according to Bloomberg. https://www.businessinsider.in/stock-market/news/chinas-10-t...

Note that recent low birthrate i.e. (2) does not immediately map to shrinking real estate demands: young people born 20-30 years ago are still moving to cities, looking for a job, and a place to sleep in, hopefully with not-too-long commutes. There will still be a bunch of young couples trying to get a home and being ruined by unfinished construction like you've mentioned.

Youth unemployment stopped being published after it skyrocketed to 20+% this year. They also no longer have the means.

Young people in Shanghai, Beijing, Shenzhen, and Xiamen/Amoy haven't had the means for a flat since... at least 6 years ago, when the per-square-meter price broke CNY 50 K. It's been understood as "maybe my parents have some savings from the 拆迁 demolition money for the down payment" sort of deal since then.

Smaller cities are more possible though.

* * *

Tangential: a good part of everyone's income in those big cities goes into rent and mortage, from the average worker to the restaurants and shops downstairs. It's always been screwed.

> 2. China is going through a weird demographic situation. The younger generations are significantly fewer in number, they will need fewer apartments to live in.

That's not really the issue. I doubt the younger generation can afford it. The problem is where the wealth is going - as in those with the $$$.

> The demand side is mostly people buying second and third units as investments.

No, at least not always. At some point you weren't allowed to buy more than 1 or even use your funds openly this way.

So to wrap up - those with wealth lost or have lost trust with China / the government and are withdrawing at alarming rates, e.g. to overseas. Due to how COVID was handled and many other cases where your wealth could just disappear - people now rather keep their $$$ elsewhere - not back "home".

I think the demographics aren't in a "weird situation" ... they have significant population decline. Baby boomers is a generation across the planet with varying years in each region or country and generations behind them are smaller everywhere. China also had a 1 child policy for a long time so this has resulted in fewer people. Fewer people (smaller generation) having fewer people results in fewer people, which ... you get it. You can't create more 30-40 year olds right now. Massive real estate growth doesn't correlate with the population. Either people or companies are going to get stuck with the costs, I doubt the government is going to prop up the company.

China’s one child policy is actually even more dramatic because before that, Mao was telling everyone to have more kids, and it worked a little too well.

Due to capital controls, most regular Chinese who lack CCP connections can't legally keep their savings "elsewhere". Speculative investments in residential real estate have been the only game in town.

you don't need CCP connections to buy BTC under the table, or to buy houses in Canada.

BTC valuations and fluctuations in price can be pegged to Xi's anti-corruption initiatives. Ditto for MBS taking over in Saudi. Lotta people were moving lots of money to other places and then GTFO.

that may not help rando middle class earner in China in 2023 -- CCP is a little tigher these days... -- but realistically they don't have the need or ability to store stuff elsewhere regardless. 5k for a retirement fund isn't getting stored in a Bermuda bank, even if they could.

Google "Andrew Left citron research evergrande". He explained it all in 2012, was banned from Hong Kong trading for 5 years as a result, just when Evergrande finally grew its ponzi scheme too big.

Long story short: the head of Evergrande was politically connected, helped build China on borrowed money, had no credible plan to ever repay all these loans, one day China decided to stop leveraging and Evergrande had to unwind... except it couldn't because it didn't have enough actual money to repay loans quickly. Too bad their bonds were sold to everyone and their grandmothers in China to try to find yields in the no-interest environment. Now that interest rates are back, nobody want junk Evergrande bonds anyway. Catch-22.

These questions indicate a misunderstanding of how markets inside China work. I suggest you don't look at "what makes sense" but more look at the reality of what's happening.

What you are also missing is that sometimes, parties are not allowed to abandon ship. Couples who have bought homes with mortgages but are not moved in for years are not allowed to give up, they are not allowed to stop paying on threat of imprisonment.

The organizations on the countersign are also not allowed to give up on mortgages because the existence of their company is at the will of the government.

There was an uprising where people banded together and just stopped paying their mortgages and basically threatened the local police to mass arrest them, and that's one of the things that spurred the greater bankruptcy, because the government didn't really want to arrest all the people, cause that would indicate they are not in control. And seeming to be in control is what the government will opt for every single time in every single decision they make.

> And seeming to be in control is what the government will opt for every single time in every single decision they make.

That reminds me of when the Battlefield 4 game was banned in China, because one of the antagonists was a rogue Chinese general.

I remember thinking that the game would have had better odds if the plot had been about a unified and monolithic Chinese government doing willful evil instead.

An autocratic government running a fiat currency economy is a dangerous thing. On the one hand they can engineer the economy quite deeply. On the other hand, the imbalances are hidden and thus likely to be worse then they would ever be in a liberal democracy. But China has many centuries of track record running a command economy.

> the government didn't really want to arrest all the people, cause that would indicate they are not in control

Objectively, not arresting them indicates they are not in control more than arresting them would.

of course, but the central government is all about seeming to be in control, not objectively in control.

mass arrest -> leads to questions about why 1000's of young couples are being arrested due to them not wanting to pay mortgages on houses they can't move into for years, and has no construction progress (the construction is abandoned), and this is a contagion that will lead to another city starting to rebel, leading to more mass arrests. Not talking about 1 or 2 people, but thousands.

vs.

the central government is taking care of the people by forcing a company into bankruptcy so they can't take advantage of people anymore.

The 2nd is the better narrative. That's what they picked. Doesn't make sense, but is what happened.

I know that this comment will seem as pro china, but really your comment is really weird and almost funny. The way you portray the two perspectives sounds like a good Chinese government action being spun like a bad thing because actually "China bad".

> Thing is, all four of these can not possibly be right. It’s a little too insane. Whoever is on the other side of all those mortgages should have abandoned ship a long time ago otherwise.

Why can't all 4 of these be right? "A little too insane" defines every bubble in hindsight.

Point to a bubble w/ a collapse and I'll give you a set of statements that are "a little too insane" such that fundamentals don't hold up.

My guess is you're gobsmacked by the idea that the fundamentals don't hold up and are saying "how can anyone be that stupid?". They didn't in 99, nor 08, nor Gamestop, nor now.

Everything can be wrapped under Greed.

[Edit] Full disclosure, I'm no better - I've lost money chasing greed.

I think it's too simplistic to blame it on greed. It's other things like, "I can't get married if I don't have a home to my name", or, "we want to have an investment to take care of ourselves in old age and there is literally nothing else we can out our money into"

On the policy side, it's very much "property taxes are the only way local government can secure revenue and so we must do whatever we can to keep the bubble inflated"

Sorry, with greed i was referring to those who sell the houses.

In 08, greed was the real estate agents and loan officers who gave loans to people who should never have had them when it was clear they couldn't afford it long run.

The home buyers many times just wanted a house but also wanted "more home" to maximize and was able to obtain a larger loan because the greed went all the way down.

first time trickle down economy works?

GameStop? that wasn't a bubble, everyone buying it knew fully well that there are no fundamentals and that they are buying it to cause a short squeeze on hedge funds who shorted too much stock. Some of them got huge gains, others kept chasing the trade after it was over.

But it definitely wasn't a bubble. It was a good trade and there were some FOMO losers who kept chasing it more than they should.

i can agree w/ this.

The problem started long time ago when the central government took most of the tax revenue from the local provincial and city governments leaving them without funding to operate. As a compensation, they were granted the authority to sell the land use right of their lands. Land is never privately owned in China. What is sold is the right to use the land for a period of time.

Since the state owned all the lands and the local governments as the sole supplier of lands, they became a monopoly in land sale. As with any monopoly especially a unchecked one they pushed to raise prices all the times to gain maximum profit. The regulation and policies of the governments aimed to build more and to keep raising the property price years after years because that's what brought in the money.

It has become unsustainable as people couldn't afford the high price. There're a glut of houses and sales have been slow yet the governments have prohibited the lowering of the price as lower housing price means lower tax revenue. There're some cases when developers lowered the price and got hit with huge fine and jailed.

High price and slow sales mean the developers like Evergrande cannot get rid of the inventory to get the capital back to fund further development. They have already sold the not-yet-built houses for the next phase but have run out of money. Couple years back the central government had forced the banks to put in severe limits on loans to the developers. They turned to shadow banks like investment fund trusts to raise money but those are blowing up just now, defaulting on bond payments. They have no money to finish the projects. They owe huge amount of debts, owe huge amount of unpaid taxes, and owe the unbuilt houses to customers. They should have been bankrupted a long time ago but the governments won't let them.

This is a huge problem for China. Housing development comprises about 25%~30% of GDP; its blowup would cripple the economy. Most ordinary people's wealth are largely tied to the value of their homes; a large drop of the house value hits most people hard, forcing them to cut back on spending, further putting down the economy. The financial institutes like banks, shadow banks, investment funds, etc have lost huge amount of money as developers unable to pay back their loans and people defaulting on their mortgages. The lowering of the property value would force more loans gone underwater. There'll be a string of bankruptcy. The local governments have large revenue shortfall and yet saddled with huge debts, because guess what, they were in the game to invest to build housing. The shortfall forces them to lay off workers, cut back on salaries, cut pensions, and cut back on services. Even the central government has no money. Last year they openly said that beyond some emergency fund there's no money left.

Any option for solutions is a bitter pill and no one has the political will to do it. It's just a downward spiral.

"The financial institutes like banks, shadow banks, investment funds, etc have lost huge amount of money" My understanding of the core problem is - Money has to come from somewhere. It is the result of China becoming world's workshop. Chinese have 45%+ saving rate and those powered up the FIs' balance sheets. This money funded all the buying of land rights, development of housing etc. How Chinese govt. deals with these toxic balance sheets before Chinese people decide to make a run for the banks, that will determine how this crisis unfolds. Ultimately there never is free lunch, unless you are the US which can print it's way out of any problem it creates for itself - what times! (be aware - the comment is by some anonymous guy on the Internets. Its most value maybe as a 'mildly entertaining conjecture'.

China has also printed a lot of money. As the currency is not freely exchangeable, it's largely unnoticed.

[1] https://www.statista.com/statistics/458148/china-m2-broad-mo...

[2] https://thesoundingline.com/kyle-bass-china-has-printed-more...

Greatly appreciate your detailed post. Very interesting!

Could I kindly request that you update your post with references?

This sounds very plausible, but it's difficult to acertain the veraciy of the claims.

Even if the references are anectodal, or based on your experience, it would be really helpful to know where this knolwege is coming from.

Ha. You’re asking for a research paper. Which areas you want citation? I’ll see what I can do later today when I got the time.

If a research paper is required, sure.

Even just how you think you know this, would be helpful.

Is it what people are saying in social media? Is it a theory you have synthesised from other sources? What are those sources?

Just using the HN referencing style [1] where you are making a factual claim.

Understand it’s a lot of work for a stranger on the internet, hence the friendly request.

[1] like this

If you want a research paper, can you do a book report on every single one of the references?

To be frank, it’s a huge entitled ask. What have you done to educate yourself in these areas besides asking strangers in the internet to do the work for you?

The end game is a political crisis. Chinese peopple tolerated the semi-dictatorship of the CCP while the economy appeared to be booming. If the economy collapses there's going to be a very unpleasant - likely violent - crisis of legitimacy.

It's one reason China is pushing a BRICs currency. If China can print its way out of this disaster there's some hope of mitigation - messy, but not fatal.

If that doesn't happen there's a good chance of a financial and political implosion, with possible Western contagion.

China is not pushing a new BRICS currency. They want the BRICS and others to use their existing currency, the yuan, for international trade. Of course this is never going to happen beyond token amounts, especially not in India.

Lula, leader of Brazil (ie, the "B" in BRICS) is calling for a common currency.

"I am in favor of creating, within the BRICS, a trading currency between our countries, just like the Europeans created the euro"

This does not sound like just using the Yuan, and is more likely to gain support of the bloc. I'm pretty sure Lula and Modi do not want to trade one devil (US) for another (China).

https://www.reuters.com/article/spain-brazil-lula/update-1-b...

>Even the central government has no money.

They have several trillion in US Dollars.

Those have equal obligations.

Can you expand? Not sure what you mean.

I assume you were talking about their 3.2T foreign exchange reserve. A large portion of that is foreign direct investment money from outside which needs to be paid back when moved out. China has up to 2.7T foreign debt as of last year, which needs to be paid back in foreign currencies. There're a fair amount of currency needs for facilitating import and export. There's not much left in the pool.

As per request, references after some quick searches. I cannot edit the original comment; here's the list.

Tax-sharing system between the central and local governments in China.

- https://www.encyclopedia.com/international/applied-and-socia...

Land ownership in China.

- https://www.lehmanlaw.com/resource-centre/laws-and-regulatio...

Government's reliance on land sales over the years.

- https://www.piie.com/research/piie-charts/local-governments-...

Local governments' debts related to housing.

- https://en.wikipedia.org/wiki/Local_government_financing_veh...

- https://www.reuters.com/world/china/debt-laden-local-governm...

Limited banks' lending to developers.

- https://therealdeal.com/national/2021/01/03/china-limits-pro...

Housing price to income, one indicator among many on housing affordability.

- https://www.numbeo.com/property-investment/rankings_by_count...

Vacancy info

- https://www.hindawi.com/journals/complexity/2020/5104578/

- https://www.bloomberg.com/news/articles/2023-08-16/china-s-h...

- https://www.nber.org/system/files/working_papers/w25297/w252...

Housing glut

- https://realmoney.thestreet.com/investing/global-equity/ever...

- https://www.nytimes.com/2021/10/12/business/evergrande-homeb...

Real estate developers ran out of money.

- https://www.cnn.com/2021/12/09/investing/evergrande-default-...

- https://www.cnn.com/2021/09/24/investing/china-evergrande-gr...

- https://www.theguardian.com/world/2023/aug/18/china-property...

- https://www.cnn.com/2022/07/04/economy/chinese-developer-shi...

- https://www.cnbc.com/2021/10/18/china-property-defaults-risk...

Developer owe unpaid taxes

- https://www.gnewswire.org/en/2023/08/20/chinese-real-estate-...

Shadow banks and investment trusts defaulting

- https://www.cnn.com/2023/08/18/economy/china-zhongrong-trust...

- https://www.reuters.com/business/finance/china-trust-deficit...

Share of housing sector in GDP.

- https://scholar.harvard.edu/files/rogoff/files/the_size_of_c...

- https://scholar.harvard.edu/files/rogoff/files/nber_27697_pe...

Large household wealth tied up in home value

- https://fortune.com/2021/12/02/chinese-real-estate-investing...

Homeowners stopped paying their mortgages

- https://www.bbc.com/news/world-asia-china-62402961

- https://www.cnn.com/2022/07/14/economy/china-property-crisis...

Government running out of money.

- https://www.hindustantimes.com/world-news/chinese-premier-li...

Government cutting salaries, pension, and services.

- https://www.visiontimes.com/2022/02/02/shenzhen-civil-servan...

- https://www.republicworld.com/world-news/china/china-slashes...

- https://www.aljazeera.com/economy/2023/5/11/chinas-cash-stra...

- https://thehongkongpost.com/2022/02/01/china-asked-governmen...

- https://www.cnn.com/2023/03/31/economy/china-pension-protest...

- https://www.nytimes.com/2023/02/15/business/wuhan-china-prot...

Aside from 2) Is it not basically the same as the US mortgage crisis, except a bigger magnitude? That it could get worse shouldn't be surprising since China doesn't exactly promote liquidity of information.

The U.S. mortgage crisis was really more of a rating issue than anything else. Risky assets were rated as having extremely little risk.

> Whoever is on the other side of all those mortgages should have abandoned ship a long time ago otherwise

they did. they moved a ton of cash into BTC, houses in Vancouver, or African mining holdings, and GTFO.

> The younger generations are significantly fewer in number, they will need fewer apartments to live in.

Not necessarily, living space per person could increase faster.

> all funded through mortgages

All promised future work is debt by definiton. with real estate being 70% if Chinese wealth, it has to be public debt, whether in the form of mortgages or government debt.

As an aside, but related to this topic, I can't wrap my head around on how one can purchase an apartment. My house's warranty deed explicitly defines the property I own, with references to plat maps that have very specific survey measurements, etc.

But if I buy a slice of a high rise building, what does the deed say? What does the plat map look like? Do I just own an N% slice of the underlying land? Do I own specifically the portion of the building that is M inches from the top of the foundation to M + Q inches above it, and X inches from the Northwest corner of the structure, etc?

For rentals, it's straightforward, since the owner pre-specifies the dimensions of the unit numbers. But how does one "own" a section of a multi-tenant structure? How does one insure just their unit, if fire and other damage risk is shared?

All ownership is a legal fiction, including land ownership.

Yeah, If you don't pay dues to the government on the property and they can take it away, you are a glorified renter

Have you considered what ownership in a company looks like? Even your plat map of the land, how much of the land do you own? Can you dig it looking for things? Can you regrade it?

And the very specific survey measurements are going to be based on landmarks that were likely planted for the purpose of making the survey work. Heaven help you if you have seismic activity move anything around.

That is, all of this only works because we define it to do so. You can do the same with a high rise. Condos are very common and have well defined common areas and housing spaces. Things get more complicated when you consider time share ownership.

I've always wondered the same, and understood it as "owning the airspace" within the specific unit, but not having any ownership of a physical structure. No control over the maintenance of the building would be a concern -- seems very an extreme version of "neighborhood deterioration" could easily occur.

I know plenty of people in the US who own condos (usually part of a pair e.g. 1A/1B), but outside of major cities the idea of owning an "apartment" (a unit in a huge building full of hundreds of other units) is somewhat foreign. However, my relatives in eastern Europe own these types of apartments as their primary investment vehicle due to poorly performing native currency / stocks.

----

via ChatGPT:

"The ownership of an apartment or condominium within a multi-unit building is indeed different from owning a single-family home. Here's how it typically works:

### Deed and Plat Map

1. *Deed*: The deed for a condominium or apartment within a high-rise will usually refer to a "unit" as defined in a "master deed" or "declaration" that has been recorded for the condominium. It will contain a description of the unit and any associated "common elements" that you may have an ownership interest in (e.g., shared hallways, gardens, and sometimes amenities like a gym or pool).

2. *Plat Map*: This would typically include a map of the entire complex, including the boundaries and location of each individual unit, along with common areas. These maps are often extremely detailed and have to be filed with a local government office.

### Ownership Structure

1. *Air Space*: In essence, you own the "air space" confined by the boundary walls of your unit, sometimes specified down to the paint on the walls. The structural elements, building exterior, and common areas are usually considered "common elements" owned collectively by all unit owners.

2. *Percentage Ownership*: Yes, you often own a percentage of the common elements, including the land upon which the building is constructed. This is sometimes proportional to the size of your unit as a percentage of the total building or complex size.

### Insurance and Liability

1. *Individual Insurance*: You would typically have a specialized form of homeowner's insurance known as an HO-6 policy that covers the internal elements of your unit (fixtures, improvements, personal property, etc.) and may provide liability coverage for incidents within your unit.

2. *Master Insurance*: The homeowners' association (HOA) will generally have a "master" insurance policy covering damage to the common elements and the overall structure. This is funded by HOA fees collected from the unit owners.

3. *Shared Risk*: The risk is essentially communal, but individual unit owners are usually responsible for the deductible on the master policy for damages originating in their units. Some complex scenarios could involve subrogation between the individual and master policies.

Understanding your specific rights and responsibilities when purchasing a unit in a multi-unit structure is crucial, and legal counsel is usually advised to navigate the complexities. Always read the declaration, by-laws, and any rules and regulations to understand your ownership fully."

In China the state owns all the land so this is less of a concern I guess. In the US there's usually some sort of HOA that you get a vote in that owns the land.

The total of Chinese Corporate debt was $29 trillion in one quarter at the end of 2021[1]. More than the U.S. Government debt.

Who’s on the other side of those mortgages? The Chinese government.

[1]: https://www.spglobal.com/marketintelligence/en/news-insights...