Nearly two years after Evergrande, China’s largest real estate developer, defaulted in 2021, eyes have turned to another major player in this market, Country Garden, which is in a similar position.
The real estate market in China slowed down significantly in the first six months of the year, as the country witnessed new defaults, reflecting the crisis of the real estate sector, which is mainly suffering from the consequences of the Corona virus outbreak due to the closure restrictions and the slowing economy.
The real estate market is the backbone of the Chinese economy, and the main source of investment for many Chinese families, so any problem that the sector suffers from affects the entire society and perhaps the world.
What happened?
And she explains The New York Times That over the past three decades, as China’s population rose and its residents poured into cities in search of economic opportunities, there was a boom in the real estate market that provided millions of jobs and savings for families, and today, this sector accounts for more than a quarter of almost all economic activity.
Since the sector’s debt crisis unfolded in mid-2021, this has led to many unfinished homes and non-payment of creditors, who are not only financial institutions, but also ordinary people.
The New York Times says that the crisis occurred after years of excessive borrowing and a construction boom. Regulators allowed developers to borrow without limits for decades, then the government suddenly intervened in 2020 to restrict the largest real estate companies’ access to funds, which led to a shortage of liquidity for these companies.
And she says CNBC The government has put in place more than 100 regulations governing the work of companies that have raised huge amounts of money through stock funds, borrowing and public offerings, and these laws have set a strict ceiling for borrowing.
One by one, companies began to collapse, because they could not pay their bills. More than 50 developers have defaulted or failed to make debt payments in the past three years, according to credit rating agency Standard & Poor’s.
Since the onset of the sector’s debt crisis in mid-2021, companies that account for 40 percent of Chinese home sales, most of which are private real estate developers, have faltered, according to Reuters.
Evergrande was one of the hardest hit companies, having borrowed more than $300 billion, including $19 billion in foreign bonds denominated in US dollars.
These developments have alarmed homebuyers, and in July, new home sales of China’s top 100 developers fell 33 percent from a year earlier.
Sales of unfinished apartments to Country Garden fell more than 50 percent in June and July, double the rate of decline in the previous five months.
Last August, the company defaulted on interest payments, indicating that it, too, is at risk of financial collapse, with $187 billion in debt.
If the group defaults, it will shock the markets. While the company’s total liabilities of 1.4 trillion yuan ($191.7 billion) do not exceed 59 percent of Evergrande’s liabilities, it has 3,121 projects in all provinces of China, compared to about 800 projects for Evergrande.
Late last month, Evergrande shares fell nearly 80 percent. Last month, the company published its earnings for 2021 and 2022, showing a net loss of more than $113 billion over the two-year period.
fallout inside
In 2022, the real estate industry will account for 13 percent of total production, and directly employ 11 percent of workers, according to the report. Euromonitor International Citing official data.
The data indicates that real estate investment in China decreased by 8.5 percent during the period from January to July 2023, while new construction fell by nearly 25 percent.
And demand for real estate purchases fell, as data from the People’s Bank of China shows that the volume of loans issued to households, which mostly consist of mortgages, fell by 200.7 billion Chinese yuan in July 2023.
The decline in consumer spending is partly due to the decline in housing prices, which has affected their savings, most of which are related to real estate.
Housing-related jobs that were once plentiful such as construction, landscaping, and painting are also starting to fade, according to the New York Times.
And with very weak home sales, the debt crisis may delay the recovery of both the real estate market and the broader Chinese economy, as real estate is a major pillar of it, according to the New York Times.
Faced with this crisis, local governments, which depend on profits from land sales to developers, have been forced to cut back on public services.
Homebuyers are becoming more wary of private brands, and home prices in many areas could come under further pressure if Country Garden resorts to fire sales to raise funds.
In light of this situation, China acknowledged that the recovery of the world’s second largest economy in the post-pandemic period will be “difficult”, and set the target growth for the country’s economy this year at about 5 percent.
The Political Bureau of the Communist Party headed by Xi Jinping said in late July that “the current economic process is facing new difficulties and challenges, mainly due to insufficient domestic demand, operational difficulties of some companies, high risks and hidden dangers in key sectors, and a complex and severe external environment.” According to public broadcaster CCTV.
Many analysts hope Beijing will introduce drastic measures to stop the downward spiral. However, some analysts are skeptical about the tools Beijing could use as it wants to balance support for the housing market and monitor debt, according to Reuters.
repercussions on the world
China’s real estate sector accounts for more than half of global new home sales and home construction, and is the world’s largest asset class, with an estimated market value of $62 trillion.
But market experts generally do not believe that China is on the verge of a financial crisis similar to the one experienced in the US economy when the crisis of the investment bank Lehman Brothers, in 2008, turned into the worst economic crisis in the world and reverberated for years.
And she said Wall Street Journal In a previous report, analysts feared a “Lehman Brothers moment” in China was on the horizon. But Xiao Shizhang, a financial analyst at research firm Gavecal, said Beijing’s “regulatory vigilance” made such an outcome unlikely.
“There will be no Lehman effect. These will be capital losses for investors,” Patrick Artus, chief economist at Natixis, told French newspaper Le Monde in its English edition. But he acknowledged that it was very difficult to know who would bear Country Garden’s debt.
A study by the European Central Bank in 2022 estimated that under China’s closed market policy, the impact of a shock there on global stock markets would be half that of a shock in the United States.
On the other hand, the impact will be greater on energy and raw materials markets, as China, for example, consumes 56 percent of the world’s copper.
China’s slowdown… does it affect the rest of the world?
China is still working to meet its economic growth forecast following the end of the strict lockdown restrictions to curb the spread of the Corona virus, known as “Zero Covid”.
2023-09-05 19:33:01
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