Beijing fears social unrest linked to housing crisis

This is an audio transcription of the FT press briefing podcast episode: Beijing fears social unrest linked to housing crisis

Jesse Smith
Hello from the Financial Times. Today is Monday August 1st. And this is your FT News briefing.

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

Sun Yu
A few of them are brave enough to take to the streets, but many of them have stopped paying mortgages.

Jesse Smith
We will talk about Beijing’s latest efforts to resolve the real estate crisis. I’m Jess Smith, replacing Marc Filippino, and here’s the news you need to start your day.

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This week, the Bank of England is meeting and policymakers there are under pressure to accelerate the pace of monetary tightening. The US Federal Reserve and the European Central Bank recently announced unusually large rate hikes in an attempt to counter persistent inflation. UK central bankers raised rates in quarter-percentage-point increments. Bank of England Governor Andrew Bailey told policymakers on Thursday that a half-point hike was on the table, but not locked in.

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The global energy crisis is forcing Western powers to relax their efforts to limit Russian oil trade. The UK has delayed a coordinated ban plan with the European Union to provide insurance to ships carrying Russian oil. This is due to fears that the imposition of immediate global restrictions could cause a spike in crude oil prices.

Thomas Wilson
Cooperation with the UK has been absolutely crucial because the UK — and Lloyd’s of London in particular — is the largest marine insurance market in the world.

Jesse Smith
That’s our senior energy correspondent, Tom Wilson.

Thomas Wilson
So really, for a global ban to have any effect, the UK needs to be part of it. So the EU went ahead thinking the UK was going to follow suit, and then the UK held off on moving forward and as quickly as we expected. And now the reason is this fear that it could potentially take a huge amount of Russian oil off the market and drive up prices. They basically waited to see if they could, along with other G7 countries, find a way to implement this complex price cap mechanism before imposing this type of ban. And then hopefully they can have the kind of twin effects that they are looking for, namely causing economic pain to Russia while preventing enormous economic pain to the rest of the world by driving up prices and therefore the ‘inflation.

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

Thomas Wilson
And more specifically, this mainly concerns Rosneft, which is the Russian state-owned oil producer. Previously, European companies were banned from any financial transactions with Rosneft, but they have now introduced a new exemption, which states that European companies can deal with Rosneft and can potentially pay Rosneft for oil if that oil is to be exported or delivered to other countries outside the EU.

Jesse Smith
This is the FT’s senior energy correspondent, Tom Wilson.

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A painful crash in the cryptocurrency market earlier this year spooked many investors. But some are starting to come back. Investment products that track crypto assets have brought in around $400 million since the start of last month. This is the longest streak of sustained weekly net inflows since March. This is Scott Chipolina from the FT.

Scott Chipolina
Now that the market seems to have stabilized, at least momentarily for a few weeks, some people have started to think that maybe this crypto winter period is over. On social media, I’m starting to see some of the common talking points and stories that some of the crypto advocates will say. An example is that crypto was a hedge against inflation. It’s been very, very difficult for anyone to argue this case for obvious reasons over the past few months. But I think, you know, over the last few weeks where there’s been some level of stability, at least in terms of crypto standards, some people may be wondering if those arguments might be again attractive or not. I’m not saying they are myself. I just think that might be one of the areas of speculation that might start to pick up a bit more momentum again for some investors.

Jesse Smith
That’s FT digital assets correspondent Scott Chipolina.

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In China, officials are worried about social unrest stemming from the country’s property crisis. Real estate developers are so indebted that they are unable to carry out construction projects. Thus, millions of people are paying mortgages for houses that have not been completed. Sun Yu of the FT reports that Beijing is currently working on a $150 billion bailout fund to try to manage these stalled projects.

Sun Yu
The rescue project itself is not so important to some extent because there are so many unfinished and half-built projects all over the country. It’s the kind of backlash against the authorities from angry landlords that worries Beijing. So to that end the bailout is very important because right now even the conservative estimate would point to at least 7-8 million home buyers struggling to get their homes completed on time.

Jesse Smith
Sun Yu, what do frustrated landlords do that make Beijing nervous?

Sun Yu
Well, a few of them have the courage to take to the streets. But many of them have stopped paying mortgages. It’s just beyond their means. I mean they make something like 5000 Rmb to 6000 Rmb per month and their mortgage payment per month would be something like 3000 to 4000. So that’s more than half of their monthly income that goes to payments mortgages, and now they can’t get a house.

Jesse Smith
What kinds of things do you hear from owners? I mean, what did they tell you about their situation and what they think about it?

Sun Yu
One of those owners, he was a former real estate broker, and he knew the area very well. He bought it three years ago, but at the time he thought it was a bargain, the price was actually high, but he thought the price would only go up. But then he told me he didn’t expect things to happen so quickly. He had a mortgage of, I think, something like 4,000 Rmb per month. So basically he’s spending two-thirds of his income on mortgage payments without getting his house back on time. The delivery of the house is, was delayed for at least nine months, then he could not get married. He’s really upset because if you want to get married, you have to have a house first. And he told me he felt a little hopeless with so many other owners. So there is this general feeling of desperation, of disillusion among the average Chinese people.

Jesse Smith
So is this bailout that the government is currently working on to help the developers complete the project so they can finally hand it over to the owners?

Sun Yu
Not necessarily. The idea now is for local governments or local government owned entities to take over these projects and then they will take project loans from the central bank or commercial banks to carry them out. So it will have nothing to do with the developers this time. That’s the idea because the developers have so much debt that the government doesn’t want them involved to any degree.

Jesse Smith
So why would the government entrust these projects to local elected officials? I mean, would the local leads be able to complete the projects more successfully than the original developers?

Sun Yu
That’s actually a good question, and that’s the challenge the government now faces because local authorities aren’t really more efficient, first of all. Second, the problem with completing these projects is that many of these projects already come with a lot of debt. So to some extent the government wants to find a way to get rid of these debts or just ignore these debts and focus on completing the projects. But can they do it? It’s an open question because as soon as these projects get new financing, the old creditors, right, the suppliers, the contractors, they’ll be looking for money. So that’s the challenge. So who do you pay first? The oldest creditors or the project itself or the bondholders? This is the problem.

Jesse Smith
Sun Yu is the FT’s economics correspondent in China. Thank you Sun Yu.

Sun Yu
Sure.

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Jesse Smith
You can read more about all these stories on FT.com. This has been your daily press briefing on FT. Be sure to check back tomorrow for the latest trade news.

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