China’s real estate crisis is eroding middle-class wealth

By | December 18, 2023

(Bloomberg) — Equity investments: 30% decline. Salary package: 30% lower. Real estate investments: decline of 20%. As Thomas Zhou looks back on 2023, his household’s finances are paramount.

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“It’s just heartbreaking,” said the 40-year-old financial worker from Shanghai. “The only thing that still keeps me going is the thought of keeping my job so I can support my large family.”

Zhou’s predicament will resonate with many in China, where slumps in the real estate and stock markets are wiping out household wealth. And as the world’s second-largest economy struggles to regain momentum after years of Covid-19 lockdowns, there is also the growing threat of unemployment.

Now, middle-class households are being forced to reconsider their money priorities, with some pulling back from investing or selling assets to free up liquidity.

At the heart of the decline in household wealth is the collapse of China’s real estate sector, which is having a profound effect on a society in which 70% of household wealth is tied up in property. Every 5% decline in housing prices will wipe out 19 trillion yuan ($2.7 trillion) in housing wealth, according to Bloomberg Economics.

Read more: China says real estate market will improve, more policies planned

“It could be the start of even more welfare losses in the coming years,” said Eric Zhu, an economist at Bloomberg Economics. “Unless there is a major bull market, small gains in financial prosperity are unlikely to offset losses in housing wealth.”

While China’s official data shows only a mild decline in existing home prices, data from real estate agents and private data providers points to declines of at least 15% in the top areas of the largest cities.

According to Bloomberg Economics, the value of the housing sector could shrink from about 20% of GDP currently to about 16% of China’s gross domestic product in 2026. This would leave about 5 million people, or about 1% of the urban workforce, are at risk of unemployment or lower incomes.

Rainy days

Financial investments offer little relief. Chinese stocks have underperformed their emerging market peers by a wide margin since at least 1998 earlier this month. Investment funds were in the red from the third quarter. Returns on banks’ asset management products remain low and deposit rates have been cut three times in the past year.

The $2.9 trillion trust industry, where wealthy Chinese investors have sought high returns from products sold by loosely regulated shadow banks, is showing cracks, with a recent scandal potentially leaving tens of billions of dollars in losses.

Net wealth per adult in China fell 2.2% to $75,731 in 2022, UBS said in its August global wealth report, while total wealth per adult fell for the first time since 2000 as non-financial holdings shrank due to of the problems in the housing market.

Media worker Echo Huang watched the value of her investment property in Ningbo, Zhejiang province, fall by about 1 million yuan from its peak in 2019. Now she considers herself lucky to have sold it in May before prices fell further.

Huang gave most of the proceeds from real estate sales to her parents for their retirement savings, putting the rest into demand deposits and money market funds that allow real-time repayments. She ruled out stock investments after her current holdings more than erased any gains since 2018.

“My business is struggling to survive, so who knows if one day I will be paid less or even fired,” the 39-year-old said. “My main goal is stability in my assets and I want to maintain sufficient liquidity.”

Protection of wealth

Even wealthy individuals are becoming more conservative, according to a joint study by China Merchants Bank Co. and Bain & Co. The number of mentions of “wealth creation” decreased.

Peter Bao, who works at a major technology company in Beijing, is pursuing a cautious investment strategy.

His shareholdings, mainly in US-listed Chinese stocks, halved at one point to the equivalent of about 5 million yuan from a peak in late 2020. Over the past two years he has moved some of his assets into money market funds and fixed income products that require less analysis. He hopes he can withstand the volatility and potential losses in the short term.

“There is no moment without fear and doubt, but there are no better options,” Bao said. “Also, I have to focus on my work to protect my source of income, so I really can’t take more time to explore other reliable investments.”

No options

Faced with few opportunities to grow her wealth, 35-year-old Dani Wang says she is “on the ground” and hopes the domestic economy and capital markets will improve by 2026.

She has deleted her trading apps and has no plans to adjust her 1 million yuan in stock and equity fund positions, or even monitor prices. She also ignores any volatility in her 50,000 yuan Dogecoin investment in early 2022, which has been halved.

Hangzhou-based technology industry worker Lily Liu, who manages several million yuan in family savings, agrees. While her parents’ real estate company experienced a sharp decline in income, her husband’s salary increase in recent years ensured that she had more money at her disposal.

“I feel like my risk tolerance has decreased along with the increase in wealth,” said Liu, who is putting one of her two houses up for sale but has no idea where to invest the proceeds. “I wouldn’t bother spending more time investing. Most likely in this macro environment it won’t amount to anything anyway.”

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