“Without a house, no marriage, no good school for children” Reasons for hunger for middle-class real estate in China[한중일 톺아보기]

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Attention is focused on the impact of the crisis on China’s second-largest real estate conglomerate Hengda Group on the global economy as well as China. Real estate, along with information technology (IT), can be said to be the two horses that have led the Chinese economy, and both are the main targets of the Xi Jinping government’s recent regulatory sword, which advocated common wealth. The Wall Street Journal (WSJ) also pointed out that the Hengda Group crisis is “a microcosm of the overheated Chinese real estate market over the years.”

Founded in 1996 when land use rights began to be freely sold in China, Hengda has built many houses for the lower middle class. Thanks to this, many Chinese have realized their dream of owning a home. However, in case of bankruptcy as it is, the primary damage will be to those who have invested in real estate projects implemented by the Hengda Group or who have received housing sales. Construction, interior, and material suppliers, which were counted as about 8,500 as of August last year, may also go bankrupt due to difficulties in operation as they do not receive payments. According to Bloomberg, the prevailing view is that Hengda Group, which is experiencing an extreme liquidity crisis, will eventually fail to repay its bonds.

Until recently, real estate in China had been booming for a long time, with prices skyrocketing. According to the National Bureau of Statistics of China, home prices in China rose for the 33rd consecutive month last year, rising an average of 8.7% in the aftermath of the coronavirus. As restrictions in China were blocked, the wealthy as well as the middle class were eager to shop for real estate overseas. Homare Endo, director of the Global Research Institute for Chinese Studies (GRICI), explains the background of the frenzy of real estate purchases among the middle class in China as follows.

In order to go to a good elementary school in China, you need a ‘real estate certificate’

In China, from the time of Jiang Zemin to the Lehman Shock, wealthy people, including party officials, had a strong tendency to purchase real estate for speculative purposes, and they encouraged price increases. Since then, in line with the rise of the middle class, real estate developers stimulated purchasing psychology by saying, “If you don’t buy now, you won’t be able to buy at this price next year.” However, Director Endo cites educational purposes in addition to economic purposes as the biggest reason that even the middle class in China jumped into the real estate frenzy. This is because, for example, a ‘real estate ownership certificate’ is required even to enter a good elementary school.

In China, until 2014, there were entrance exams for elementary and middle schools, which are compulsory education, and it was common for schools to pay bribes to get into good schools. The school allowed admission as customary in consideration of the amount offered as bribes, even if the grades were rather poor.

When the system of bribery for exams was rampant even in elementary schools, where compulsory education is compulsory, President Xi distributed a notice stating, “Abolish entrance exams in compulsory education.” Therefore, from 2014 onwards, the ‘school district system’ has been implemented, in which the elementary school and middle school are decided according to the area in which they live.

But here another problem arose. Although the entrance exam was abolished in compulsory education, admissions began to be ranked according to whether or not real estate was owned. In a nutshell, this year’s document, ‘Opinion to Recruitment of Compulsory Education Admissions in Jiading District, Shanghai,’ shows that 6-year-old school-age children who have submitted a ‘real estate certificate’ will be admitted first and ranked in effect. Although there are differences depending on the region, it is said that this is the case for first-tier or second-tier cities in China, where cities are divided into first-tier (metropolitan), second-tier, and third-tier cities. For this reason, when looking at the real estate problems in Hengda and China, it is necessary to look at the social structural background as well.

One-child policy harms 35 million people… The house is a man’s essential coma

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It is a well-known fact that China is experiencing the side effects of the ‘one household, one child’ policy that has been maintained for the past 40 years. In China, where there is a remnant of Confucian culture, the preference for boys was very prominent as it was possible to have only one child. In the past, it is also the background of the frequent incidents of female infants being abandoned or killed immediately after childbirth in China.

As a result of decades of accumulation of such events, a census conducted in November last year showed that there were about 35 million more Chinese men of marriageable age than women. In response to this, female sociologist Professor Li Inhe (李銀河) also argued that by 2050, about 40 million Chinese men aged 35 to 59 will be unable to find a partner forever.

A man who cannot get married because he has no mate is considered an ‘unsold man’ and is called ‘Shengnan (剩男)’. According to the state-run Xinhua News Agency, Chinese men, especially in rural areas, ‘Shengnan’, need to have ‘three wedding items’ in order to get married. House, tea, and dowry (彩禮, chairi) The most difficult gate among the three coma items is by far the house. Rural bachelors often bear a tremendous burden for marriage that they cannot afford even if they earn a lifetime income with their economic power.

In order to marry their one and only son, the scene of raking up money that even the parents have without money and looking for a newlywed house even in debt is often found in the middle and lower classes of China. In addition, as China’s economy grew and real estate prices skyrocketed, in the past, it was enough for a new house in a village, but recently, it is said that the standard is to get it from the prefectural level. Because women are precious due to their deformed sex ratio, they still follow this pre-modern custom by crying and eating mustard. Such a socio-demographic background is also a factor that fuels the real estate boom in China.

President Xi Jinping is most concerned about the explosion of middle-class discontent

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In China, there is a saying ‘6 wallets’ (6个钱包). It refers to the sum of the assets of a total of six people, including two parents of the child, two parents and two grandparents each. The word, a kind of neologism, was popular in 2018 when Pan Kang, a member of the Monetary Policy Committee of the People’s Bank of China at the time, mentioned on a broadcast that “buy a house with six wallets.” You will need all six of these wallets to buy a single house in an average household. Because real estate is so expensive, it is said that the six wallets of Chinese people are usually used to purchase real estate.

President Xi Jinping is most concerned about the explosion of discontent among the middle class, who have gathered six wallets to buy a house. If they are not managed, social unrest in China will spread out of control. In the 2017 National Congress work report and the following year, Xi warned that “a house is for living. You should not buy it for speculation.” However, speculative real estate purchases, led by the wealthy, were not eradicated. Even if the Hengda Group goes bankrupt and loses money and the wealthy suffer huge losses, this is not a big problem for Xi. Although they are relatively small in number, they have a lot of things, so they tend to look for other investment targets without causing any disturbance.

But the lower-middle class is different. Director Endo believes that if the Chinese authorities step forward on the Hengda Group incident, it will start with consideration for those who make up the largest proportion of the population.

The procedure for bankruptcy without government intervention… Hengda fate, in the hands of President Xi

On the 23rd, Hengda Group announced that it had settled the interest payments on RMB bonds that had returned to maturity. It seemed that one hurdle had been overcome, but it was reported that the interest on the dollar bond had not been paid. In addition, large debt repayment schedules are scheduled one after another. Bankruptcy due to default (default) is observed as a scheduled procedure, unless the Chinese authorities exceed expectations and provide drastic support. Some foreign media, including Hong Kong’s Mingbao, reported that the Chinese authorities would nationalize Hengda Group’s core real estate business.

In the end, the fate of the Hengda Group depends on the will of President Xi, and experts analyze that it is unlikely that he will go out to rescue real estate, the main culprit of the gap between the rich and the poor, given his recent theory of common wealth. Maj. Endo also weighs in on the side of President Xi’s “not bailing out Hengda”. This is because, a year ago, China’s relevant ministries called Hengda and 12 other real estate conglomerates to propose the ‘three baselines’, and Hengda has already violated all of them. These three baselines are: 1. A company’s asset-to-liabilities ratio should be within 70%, 2. Net debt-to-equity ratio should also be within 100%, and 3. It should have more cash than short-term liabilities. If President Xi bails out Hengda, not only would he be making an exception to the guidelines, but he would risk further escalating the real estate bubble with the wrong signal.

However, Endo points out that President Xi will not allow Hengda to go bankrupt ‘suddenly’, as he cannot ignore the chaos caused by Hengda’s bankruptcy. As mentioned earlier, if Hengda goes bankrupt, it is clear that housing sellers below the middle class who are paying the down payment, loan, and interest will be greatly shaken. Moreover, Xi is in great need of socio-political stability ahead of the Beijing Olympics next year and the start of his third term. Therefore, it is analyzed that the Hungda Group will be organized over a long period of time with minimal damage to them.

On the 19th of last month, Hengda had a meeting with financial supervisory authorities including the People’s Bank of China, and Chairman Xu Jain also resigned. Of the 130 financial crises that have occurred around the world so far, 100 of them have been related to real estate. For now, even if the Hengda crisis does not lead to a global financial crisis scenario, it seems clear that it will greatly deepen the crisis in the Chinese real estate industry for the time being.

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