Ailing real estate conglomerate Evergrande highlights a deeper underlying issue: China’s property market is cooling off after years of oversupply
Chinese authorities finally weighed in on the Evergrande crisis on Friday. The People’s Bank of China said the company had mismanaged its business but risks to the financial system were “controllable.”
“In recent years, the company has failed to manage its business well and to operate in accordance with market changes,” Zou Lan, director of the financial market department at the Chinese central bank, said at a press briefing. “Instead, it blindly diversified and expanded, resulting in serious deterioration of its operating and financial indicators, which eventually led to risks.”
Mark Williams, chief Asia economist at Capital Economics, estimates that China still has about 30 million unsold properties, which could house 80 million people. That’s nearly the entire population of Germany.
Here’s a look at some of those projects, and how the problem first originated.
Real estate and related sectors are a massive part of China’s economy, accounting for as much as 30% of GDP. The proportion of economic output related to construction and adjacent activities is “far higher than in other major economies,” according to Williams.
For decades, that has helped the country sustain rapid economic growth.
But for years, critics have questioned whether that engine of growth was creating a ticking time bomb for the world’s second largest economy. That’s in part because of the massive debt many developers took on to finance their projects.
As China’s most indebted developer, Evergrande has become the poster child of unsustainable growth, with more than $300 billion worth of liabilities.
In a recent report, Zhu wrote that 12 Chinese real estate firms defaulted on bond payments totaling about 19.2 billion yuan (nearly $3 billion) in the first half of the year.
“This accounted for near 20% of total corporate bond defaults in the first six months of the year, the highest across all sectors” in mainland China, she added.
The pandemic brought activity to a temporary standstill. But construction later roared back to life as China reopened, and the country’s property market enjoyed a brief rebound.
Since then, however, the market has sputtered again. And there’s no sign of immediate relief.
Over the last few months, “measures of price growth, housing [construction] starts and sales” have tapered off considerably, Zhu noted. In August, property sales, as measured by floor space sold, dropped 18% compared to the same time the previous year, she added.
That same month, new home prices edged up 3.5% “from a year earlier, the smallest growth since the property market rebounded from the pandemic fallout in June 2020,” wrote Zhu.
“Residential property demand in China is entering an era of sustained decline,” Williams wrote in a research note. He called this “the root of Evergrande’s troubles — and those of other highly-leveraged developers.”
Then there is the problem of unfinished projects, even if there is demand. The majority of new properties in China — about 90% — are sold before being completed, meaning that any setbacks for home builders could directly impact buyers, according to economists.
“[This] gives the authorities a strong incentive to ensure that ongoing projects continue as failing developers are restructured,” said Williams.
Zou, the central bank official, said Friday that Evergrande was an isolated phenomenon.
“The domestic real estate market has maintained stable land prices, housing prices, and expectations. Most real estate companies operate steadily and have good financial indicators. The real estate industry is generally healthy,” he told reporters.
It’s true that not all real estate companies are in dire straits. While some players are clearly struggling, “most developers are not on the brink of default,” according to Julian Evans-Pritchard, a senior China economist at Capital Economics.
“With a couple of exceptions, most major developers are in a much stronger financial position than Evergrande and should be able to weather a temporary spike in their borrowing costs amid contagion fears,” he said in a note to clients. That should provide some reassurance “amid the current market jitters,” at least in the short term, he added.
But in the long run, it may matter little.
“Successfully navigating the structural decline in housing demand over the coming decade will prove more challenging,” wrote Evans-Pritchard. “A drawn-out consolidation of the sector over many years seems more likely than an imminent wave of developer failures.”
— CNN’s Beijing bureau contributed to this article.
