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A car with a sign on the windshield reading “Country Garden homeowners rights protection” is parked outside a Country Garden construction site in Beijing on Aug. 17. (AP/Yonhap)

“Young people are making the choices to not get married, not buy houses, and not have children. Everything is discouraging people from buying real estate this year. I am saving up cash to prepare for the future.”

He Ying, 36, who lives in Guangzhou with her 2-year-old son, recently decided to put off buying an apartment. Her financial situation was not in great shape, so much so that her husband moved 1,000 kilometers away to Zhejiang in search of work.

Hong Kong’s South China Morning Post reported on Thursday that China’s middle class is avoiding purchasing real estate and automobiles due to the unstable economic situation.

Following the end of the COVID-19 pandemic, China’s economy is experiencing a major slump in its real estate market, epitomized by a potential default by real estate developer Country Garden. The slowdown in the real estate industry, which accounts for almost 30% of China’s gross domestic product, is simultaneously hurting the finances of local governments, putting pressure on the Chinese government in turn.

Normally, the central government would try to safeguard the economy through large-scale government spending, but due to the weakening yuan, it’s finding it difficult to come up with countermeasures. The Chinese economy, the second largest in the world, is being exposed to the triple threat of a real estate slump, worsening local finances, and the depreciation of the yuan.

On Wednesday, China’s National Bureau of Statistics published indices regarding the sales prices of new commercial residential buildings in 70 medium- and large-sized cities in July. The indices were down by 0.23% on average. Property prices dropped in 49 — or more than two-thirds — of the 70 cities studied, the number of cities where prices fell increasing by 11 compared to the previous month’s study.

Some analysts say the actual downturn in property prices is steeper than what the Chinese government’s official statistics suggest. Citing a real estate agent, Bloomberg reported that real estate prices in Hangzhou, where the head office of Alibaba is located, dropped by 25% to 28% compared to October 2021, when houses peaked in value. On Friday, it was revealed that Chinese real estate trust company Zhongrong International Trust missed payments on its mature products worth 350 billion yuan (US$55.3 billion), indicating that the crisis within the real estate market may be spreading to the finance sector.

A crisis in the real estate market, one of the most powerful engines of China’s economic growth, is leading to financial crises within local governments. Chinese local governments have been funded through the two axes of taxes and revenue from the sales of land use rights. However, their earnings have been decreasing recently due to the downturn in the real estate market, which in turn has heightened the possibility of local government financing vehicles, or special purpose companies that carry out infrastructure development projects financed by holding the assets of local governments as collateral, defaulting.

The debts of local governmental lending organizations are known as “hidden debts” because they are not accounted for in official government statistics. The International Monetary Fund estimates that the debts of local governmental lending organizations in China may account for as much as 53% of the country’s GDP this year.

The yuan’s decreasing value is cause for concern as well. On Thursday afternoon, the yuan’s rate of exchange against the dollar remained in the 7.30-yuan range in foreign exchange markets across the region. If the exchange rate falls below that recorded on Nov. 1 last year — 7.328 yuan per US dollar — the dollar-to-yuan exchange rate would reach a 15-year low. If the Chinese government stimulates the economy through government spending, a vicious cycle of the yuan devaluing even further due to capital flight may ensue.

Regarding suggestions by Western media that China is heading into an economic crisis, Beijing responded that things will not turn out according to the West’s prediction, though there will be ups and downs in China’s economic recovery. On Wednesday, when asked what he thinks about the West’s view that an economic slowdown in China may spell disaster for international economic development, Wang Wenbin, the spokesperson of China’s Foreign Ministry, remarked, “China’s high-quality economic development has made solid progress with bright spots both in the quality and quantity of growth.”

By Cho Ki-weon, staff reporter; Choi Hyun-june, Beijing correspondent

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