China Property Market Collapse Could Bring US Inflation Relief

In 2020, President Donald Trump signed the Holding Foreign Companies Accountable Act. This law was designed to pressure Chinese companies to submit to audits or be delisted from our capital markets.

According to the Treasury Department, in May 2021, there were 248 Chinese companies with a total market capitalization of $2.1 trillion on New York Stock Exchange, NASDAQ, and NYSE American, which are the three largest exchanges in the United States. By March 2022, there were 260 Chinese companies with a total market capitalization of only $1.3 trillion.

In August 2022, five state-owned Chinese companies announced that they were going to delist from the New York Stock Exchange.

In August, Alibaba formally applied to the Hong Kong Stock Exchange to be their primary listing. They don’t want to leave New York, but they will likely be delisted.

As more Chinese companies are pushed out of the United States, Chinese companies will have to rely on the Chinese banking system, which is facing a systemic crisis in China’s property sector.

China’s banks have $9.2 trillion dollars of exposure in its property sector.

Economist George Magnus wrote, “In China, the property market is a $60trn sector — or four times GDP — which accounts for about a quarter to a third of annual growth.”

This growth in real estate sent hundreds of millions of people from the countryside to urban areas. According to the World Bank, China’s urban population increased from 200 million in 1980 to 900 million in 2020.

From 1978 to 2008, China’s economy grew by investing in infrastructure, real estate and manufacturing. According to economist Michael Pettis, who is a professor finance at Peking University’s Guanghua School of Management, and Senior Fellow at Carnegie:

“This began to change ten to fifteen years ago, by which time China had largely closed the gap between the investment it had and the investment that the economy could productively absorb. When that happened, China should have dramatically lowered the share of production it reinvested, but to do so without causing a sharp drop in the growth of economic activity required rebalancing the economy toward greater consumption, which in turn meant transferring income from previously successful parts of the economy to the household sector.”

In the United States, a person typically buys a house after it is built. In China, people are making payments on houses before they are finished.

When the Chinese economy was booming, it took years for some of these apartment buildings to be finished. Understandably, some Chinese homeowners are worried that these houses might never get built as the Chinese economy slows from COVID Zero policies and Evergrande’s default.

This year, hundreds of thousands of Chinese in almost 100 cities have joined a movement, through WeChat and Douyin, to stop paying their mortgages until their apartments are finished.

According to Keyu Jin, who is a professor of economics at London School of Economics:

“What is currently needed is a backstop to the self-fulfilling crisis: the belief that property developers will be insolvent impels buyers to hold off their purchases and financing to dry up.”

According to Bloomberg columnist Michael Brooker:

“If buyers lose confidence and home prices fall significantly, that would erode the principal store of Chinese households’ wealth, sending multiplier effects cascading through the economy, stock market, global commodity prices, and world demand.”

The Chinese people should demand that the government help these developers finish their projects. The problem is that it is difficult for people to trust a government that has no regard for the rule of law.

In the best-case scenario, China’s economy could have a lost decade like Japan. From a political standpoint, this mortgage boycott also has the potential to be China’s Solidarity Movement.

In June 1979, Pope John Paul II spent 9 days traveling all over Poland. Approximately 10 million Poles saw him speak.

According to the Victims of Communism, during this trip, “The Poles began to realize just how greatly they outnumbered the communists in charge.”

If these hundreds of thousands of Chinese homeowners want their homes to be built, they need to organize a massive protest in Tiananmen Square and demand that the government will stabilize the housing market.

During the Civil Rights Movement, Blacks and whites rode together on buses through the Jim Crow South to protest segregation. In 1961, the Freedom Riders were met with violence, but their courage forced the government to end segregation at bus terminals.

The Freedom Riders also inspired other people to join the Civil Rights Movement. To organize a protest in Tiananmen Square would show the Chinese government, and the world, that these protestors are not afraid.

Slower growth from China would also bring down gas prices, and inflation in general.