Beijing fears social unrest from property crisis

This is an audio transcript of the FT News Briefing podcast episode: Beijing fears social unrest from property crisis

Jess Smith
Good morning from the Financial Times. Today is Monday, August 1st. And this is your FT News Briefing.

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Europe and the UK are easing up on Russian oil sanctions. Investors are returning to the crypto market. And in China, struggling property developers are delaying construction projects, and millions of frustrated mortgage holders don’t know when their homes will be finished.

Sun Yu
A few of them have the courage to take to the streets, but a lot of them have stopped paying mortgages.

Jess Smith
We’ll talk about Beijing’s latest effort to fix the property crisis. I’m Jess Smith, in for Marc Filippino, and here’s the news you need to start your day.

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This week, the Bank of England meets, and policymakers there are under pressure to step up the pace of monetary tightening. The US Federal Reserve and Europe’s central bank recently announced unusually large rate hikes to try and counter persistent inflation. British central bankers have been raising rates by a quarter of a percentage point increments. Bank of England governor Andrew Bailey said when policymakers gather this Thursday, a half-point increase is on the table, but it’s not locked in.

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The global energy crisis is forcing western powers to ease back on their efforts to limit Russian oil trading. The UK has delayed a plan for a co-ordinated ban with the European Union on providing insurance to vessels carrying Russian oil. That’s due to fears that imposing immediate worldwide restrictions would cause crude oil prices to spike.

Tom Wilson
UK co-operation was absolutely pivotal because the UK — and Lloyd’s of London in particular — is the biggest maritime insurance market in the world.

Jess Smith
That’s our senior energy correspondent Tom Wilson.

Tom Wilson
So really for a global ban to have any effect, the UK needs to be a part of it. So the EU went ahead on the basis that they believed that the UK was going to follow suit, and then the UK has held back from pushing ahead and as quickly as we expected them to. And now the reason for that is this concern that doing so would potentially pull a huge amount of Russian oil off the market and spike prices. They basically delayed to see can they, with other G7 countries, figure out a way to get this different complicated price cap mechanism in place before imposing this type of ban. And then hopefully they can have the kind of twin effects that they’re seeking, which is to cause economic pain to Russia whilst preventing huge economic pain to the rest of the world by driving up prices and therefore inflation.

Jess Smith
And in another move, Tom says the EU also quietly introduced a subtle amendment to some of the existing restrictions on dealings with Russian oil exporters.

Tom Wilson
And specifically, this is most relevant to Rosneft, which is the Russian state owned oil producer, previously, European companies were banned from all financial dealings with Rosneft, but they’ve now introduced a new exemption, which says that European companies can deal with Rosneft and can potentially pay Rosneft for oil if that oil is going to be exported or delivered to other countries outside of the EU.

Jess Smith
That’s the FT’s senior energy correspondent Tom Wilson.

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A painful crash in the cryptocurrency market earlier this year frightened many investors away. But some are starting to return. Investment products that track crypto assets have pulled in about $400mn since the beginning of last month. That’s the longest run of sustained weekly net inflows since March. Here’s the FT’s Scott Chipolina.

Scott Chipolina
Now that the market seems to have stabilised, at least momentarily for a few weeks, some folks have started to think perhaps this crypto winter period is over. On social media, I’m starting to see some of the common talking points and narratives that some of crypto’s advocates will say. One example is that crypto was a hedge against inflation. It’s been very, very hard for anybody to make that case for obvious reasons in recent months. But I think, you know, in the last few weeks where there’s been some level of stability, at least as far as crypto standards are concerned, perhaps some people are considering whether or not those arguments might be appealing again. I’m not saying that they are, myself. I just think that that might be one of the areas of speculation that might be starting to get a little bit more momentum again for some investors.

Jess Smith
That’s the FT’s digital assets correspondent Scott Chipolina.

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In China, officials are getting nervous about social unrest stemming from the country’s property crisis. Real estate developers are so burdened with debt, they’re unable to complete construction projects. So millions of people are paying mortgages for homes that haven’t been completed. The FT’s Sun Yu reports that Beijing is now working on a $150bn bailout fund to try and deal with those stalled projects.

Sun Yu
The bailout project on its own isn’t that big to some degree because there are so many unfinished, half-built projects nationwide. It’s the sort of backlash against the authorities from angry homeowners that concerns Beijing. So to that end, the bailout is very important because right now even the conservative estimate would point to at least 7mn to 8mn home buyers who are having trouble seeing their home being completed on time.

Jess Smith
Sun Yu, what are frustrated homeowners doing that’s making Beijing nervous?

Sun Yu
Well, a few of them have the courage to take to the streets. But a lot of them have stopped paying mortgages. It’s just beyond their means. I mean, they make something like Rmb5,000 to Rmb6,000 per month and their mortgage payment per month would be something like 3,000 to 4,000. So it’s more than half of their monthly income goes to mortgage payments, and now they can’t get a home back.

Jess Smith
What kinds of things are you hearing from homeowners? I mean, what did they tell you about their situation and how they feel about it?

Sun Yu
One of these homeowners, he was a former real estate broker, and he essentially understood the sector very well. He bought that three years ago, but at the time he thought it was a great deal, the price actually was high, but he thought the price will only go up. But then he told me that he didn’t expect that the things to go down so fast. He had a mortgage of, I think like, something like Rmb4,000 per month. So basically he’s spending two-thirds of income on mortgage payments without getting his home back on time. The delivery of the home is, has been delayed for at least nine months, and then he could not get married. He’s really upset about it because if you want to get married, you need to have a home first. And he told me that he feels sort of hopeless with so many other homeowners. So there’s this general feeling of hopelessness, disillusionment among the average people in China.

Jess Smith
So this bailout that the government’s now working on, is it aimed at helping developers complete the project so they can finally hand them to owners?

Sun Yu
Not necessarily. The idea now is for the local governments or local government-owned entities to take over these projects, and then they will take project loans from either the central bank or the commercial banks to complete them. So it won’t have anything to do with developers this time. That’s the idea because developers owe so much debt the government don’t want them to be involved to some degree.

Jess Smith
So why would the government hand these projects to local officials? I mean, would local officials be able to complete the projects more successfully than the original developers?

Sun Yu
This actually is a good question, and this is the challenge that the government is now facing because local authorities are not really more efficient, number one. Number two, the problem with completing these projects is that many of these projects, they already come with a lot of debt. So to some degree, the government wants to find a way to get rid of these debts or just ignore these debts and to focus on completing the projects. But can they do so? That’s an open question because as soon as these projects they got any new financing, the old creditors, right, the suppliers, the contractors, they’ll chase for money. So that’s the challenge. So who do you pay for first? The oldest creditors or the project itself or even the bondholders? That’s the issue.

Jess Smith
Sun Yu is the FT’s China economics correspondent. Thanks, Sun Yu.

Sun Yu
Sure.

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Jess Smith
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.