Developers have huge debt. Now home sales are down, Beijing is banning borrowing and buyers are balking at higher prices
China Evergrande Group, a distressed property developer, is the first high-profile real-estate company to be in serious trouble Beijing’s campaign to tame a roaring property market.
It might not be the last.
As China enters, what many economists say is the final phase of one of the The biggest real-estate boom in history, it is facing a staggering bill: more than $5 trillion in debt that developers took on when it was good, according to economists at Nomura Holdings Inc.
The debt is almost double that at the end of 2016 and last year exceeded the overall economic output of Japan, the world’s third-largest economy.
Chinese markets return to Evergrande angst over break
With warning signs on the debt of nearly two-fifths of growth companies borrowed from international bond investors, global markets are poised for a potential wave of defaults.
Chinese leaders are getting serious about addressing debt by taking a series of steps to curb excessive borrowing. But doing so without hurting the property market, crippling more developers and derailing the country’s economy is turning into one of the biggest economic challenges for Chinese leaders, and one that resonates globally when mismanaged. could.
luxury developer Fantasia Holdings Group The company failed to pay $206 million in dollar bonds that matured on October 4. In late September, Evergrande, which has more than $300 billion in obligations, missed two interest-paying deadlines for the bond.
Asia’s Junk-Bond Markets Last week suffered a wave of sales. On Friday, bonds of 24 of 59 Chinese growth companies on the ICE BofA Index of Asian Corporate Dollar Bonds were trading at over 20% yields, indicating a high risk of default.
Some potential home buyers are leaning, forcing companies to cut prices to raise cash, and could potentially accelerate their slide if the trend continues.
Overall sales among China’s 100 largest developers were down 36% in September from a year earlier, according to data from CRIC, a research arm of the property services firm. E-House (China) Enterprise Holdings Ltd showed that the 10 largest developers, including China Evergrande Country Garden Holdings company and china wenke The company saw a 44% drop in sales from a year ago.
Economists say most Chinese developers remain relatively healthy. Beijing has the firepower and tighter control of the financial system needed to prevent the so-called Lehman moment, in which a corporate financial crisis snowballs, he says.
In late September, The Wall Street Journal reported that China had told local governments Be prepared for potentially intensifying problems in Evergrande.
But many economists, investors and analysts agree that even for healthy enterprises, the underlying business model—in which developers use debt to fuel a steady churn of new construction Despite the demographics being less suited to new housing– Likely to change. Some developers can’t survive the transition, he says.
Of particular concern is some developers’ practice of relying heavily on “presales”, in which buyers still pay upfront for unfinished apartments.
The practice, more common in China than in the US, means developers are borrowing interest-free from millions of homes, making it easier to continue expanding but potentially leaving buyers without ready-made apartments for developers to fail. needed.
According to China’s National Bureau of Statistics, pre-sales and similar deals were the region’s biggest funding sources since August this year.
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“There is no return to the previous growth model for China’s real estate market,” said Houz Song, a research fellow at the Paulson Institute, a Chicago think tank focused on US-China relations. China is likely to put a set of limits on corporate lending, known as the “three red lines” imposed last year, which helped trigger the recent crisis on some developers, he added. That China can ease some other sanctions.
While Beijing has avoided explicit public statements on its plans to deal with the most indebted developers, many economists believe leaders have no choice but to keep the pressure on them.
Policymakers are determined to reform a model fueled by debt and speculation as part of President Xi Jinping’s broader efforts to mitigate the hidden risks that could destabilize society, especially at key Communist Party meetings next year. before. Mr. Xi is widely expected to break the precedent and extend his rule to a third term.
Economists say Beijing is concerned that after years of rapid home price gains, some may be unable to climb the housing ladder, potentially fueling social discontent, as economists say. The cost of young couples is starting to drop in large cities, making it difficult for them to start a family. Median apartment costs in Beijing or Shenzhen now exceed 40 times the average family’s annual disposable incomeAccording to JPMorgan Asset Management.
officials have said that they are Concerned about the asset market posing a risk to the financial system. Reinforcing developers’ business models and limiting debt, however, is almost certain to slow investment and cause at least some slowdown in the property market, one of the biggest drivers of China’s growth.
The real estate and construction industries account for a large portion of China’s economy. Researchers Kenneth S. A 2020 paper by Rogoff and Yuanchen Yang estimated that industries, roughly, account for 29% of China’s economic activity, far more than in many other countries. Slow housing growth could spread to other parts of the economy, affecting consumer spending and employment.
Government figures show that about 1.6 million acres of residential floor space were under construction at the end of last year. This was roughly equivalent to 21,000 towers with the floor area of the Burj Khalifa in Dubai, the tallest building in the world.
Housing construction fell by 13.6% in August below its pre-pandemic level, as restrictions on borrowing were imposed last year, calculations by Oxford Economics show.
Local governments’ income from selling land to developers declined by 17.5% in August from a year earlier. Local governments, which are heavily indebted, rely on the sale of land for most of their revenue.
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