China’s property market has undoubtedly been a key driver of its economy ever since the country began opening its markets in the 1980s, and still proves to be a major contributor to the economy; estimated to make up 17-29% of GDP. The country has been reported to have been constructing more than 10 million residential units annually. However, this important market sector has also proven to be an unstable one since the 2010s. The country’s uncontrolled urbanisation, construction activities, and investment rate from citizens, inevitably created a bubble in the housing market. Rising property prices and continued development and construction regardless of continuously shrinking demand for housing have subsequently created many “ghost towns”, with around 65 million properties, or 20% of the total urban housing properties, being reported as vacant.
More recently, the second half of 2021 further reaffirmed the market’s turbulence. The government’s “Three Red Policy” in 2020 requires property developers to meet certain criteria before they can apply for refinancing in an attempt to rein in the highly indebted property-development sector, regulate the leverage taken on by developers, and limit their borrowing. This has significantly impacted major property developing companies. This includes Kaisa, who missed a 400 million USD bond payment, Shimao Group, who defaulted on a 101 million USD project loan, and most recently, Yuzhou Group, who requested a deferral for repayment of offshore bonds worth 582 million USD. Amongst such businesses, China’s second-largest developer, Evergrande, is now at risk of becoming the country’s biggest-ever bankruptcy case.
Evergrande’s demise began with the widespread online sharing of a letter in August 2021, where the property developer warned the Guangdong government that it would default on its debts if it failed to raise enough cash to cover them and that it was at risk of experiencing a cash crunch. Since then, Evergrande has been engulfed by a liquidity crisis that eventually resulted in default in early December. Despite its attempts to raise capital through selling off its assets and freezing its shares, Evergrande has missed a total of $20bn (£14.7bn) of off-shore market bond payments and is indebted to an estimate of 171 domestic banks and 121 financial firms. Its liabilities exceed $300bn (£228bn), and in December 2021, Evergrande defaulted on US$1.2 billion of its overseas bonds. Shares in the group have steadily plummeted, until they were eventually halted in early January 2022. Since then, international bondholders have threatened legal action in a collective public statement criticising their lack of engagement and opaque decision-making.
The collapse of Evergrande is now ending the over-supplied real estate and the attendant construction that has been the primary strut of national growth for a decade. Its impact on housing and construction is inevitable, with the group having almost 800 projects in more than 230 cities, and many people also having bought property from Evergrande even before building work began, having paid deposits and they could potentially lose that money if it goes bust. New housing starts have been the lowest since 2017, and its impacts on construction and design firms and material suppliers are also inevitable, such companies being at risk of incurring major losses and even bankruptcy. Despite attempts from the Chinese government to slow down this decline through loosened credit, opened up mortgages, and funnelling money to bankrupt developers, the decline in property transactions has inevitably pushed construction into freefall. China’s economy is slowing to the lows not seen since 1990 and it has been estimated that its slowdown to 4.3% next year from 7.1% this year can directly reduce wider world GDP growth by around 0.5% points.
In short, Evergrande’s liquidity crisis has certainly revealed the big supply-demand gap in China’s housing market, and the need to change the country’s unsustainable model of property-led growth. The debt crisis faced by Chinese property giants had triggered concerns amongst some international investors that it could have a major impact on global financial markets; if China fails to save its property market, there could inevitably be contagion in the international markets, even potentially leading to a global economic crisis resembling the aftermath of the 2008 Lehman Brothers collapse.
Analyst: June Seo Chung
Sector Head: Gregor MacDonald