Real Estate crisis looms large on the Chinese economy
When China Evergrande, previously the largest property developer in China, conducted its initial public offering in Hong Kong in 2009, the real estate market in the country was experiencing significant growth. The enthusiasm surrounding the company was such that for each fortunate individual who managed to acquire at least one share of stock, 46 others found themselves excluded from participation. How times have changed. Evergrande, now emblematic of the cyclical nature of China’s real estate market, was delisted from the Hong Kong Stock Exchange on Monday. This event comes four years after the company initially alerted stakeholders to its financial troubles and two years following its pursuit of bankruptcy protection. Evergrande’s collapse, characterized by $300 billion in debt, reflects the gradual and arduous disintegration of China’s property sector. Government interventions prevented an abrupt collapse, resulting instead in a protracted deceleration.
The housing downturn has not resulted in the catastrophic impact experienced during the 2008 financial crisis; however, it has persisted as a significant concern for the economy over the past five years, with no resolution apparent on the horizon. In the previous month, there was a notable decline in new home prices, marking the most rapid decrease observed in a nine-month period, while the prices of existing homes persisted in their downward trajectory, as reported by the National Bureau of Statistics of China. As the economic downturn persists, the government has intervened to support a select number of financially troubled property companies, thereby averting a widespread failure in the sector. China Vanke, a prominent player in the real estate sector, has consistently relied on its principal shareholder, the state-owned Shenzhen Metro, for financial assistance to meet its obligations stemming from its substantial $51 billion debt burden. Shenzhen Metro has provided $3.4 billion through nine loans to Vanke this year. Vanke announced on Friday a loss of $1.7 billion for the first half of the year, from January to June, representing a 21 percent decline compared to the same period last year.
When Beijing implemented regulations in 2020 aimed at limiting the excessive borrowing of property developers, it initiated a downward spiral, driving numerous real estate firms to the edge of collapse. However, the government has refrained from implementing an industrywide bailout, opting instead for measures like easing purchase restrictions and promoting increased lending by banks. Andrew Collier, a senior fellow at the Harvard Kennedy School, indicated that the outcome suggests the “pain is going to go on for a very long period of time.” This strategy contrasts sharply with the measures taken during China’s previous notable real estate downturn in 2015, when the government allocated hundreds of billions of dollars to incentivize residents to exchange their deteriorating homes in smaller cities and towns for cash. While that policy revitalized the market, it simultaneously triggered another construction surge driven by developers assuming substantial debt burdens.
While a number of the largest developers are currently engaged in restructuring efforts, a significant number of smaller firms have unfortunately failed. The downturn has significantly impacted businesses and employment in sectors that flourished during the real estate boom. The ongoing decline in the property market occurs during a particularly precarious period for the Chinese economy. A trade war has constrained China’s capacity to stimulate its export sector, while consumer expenditure continues to exhibit weakness. The government is allocating substantial resources to semiconductors, robotics, and various other technologies; however, these investments are improbable to yield returns swiftly enough to compensate for the downturn in the property sector. The significance of the real estate industry cannot be overstated. At its zenith, the sector represented approximately 30 percent of China’s economic landscape. Revenue generated from land transactions with property companies has bolstered the financial resources of local governments. A significant number of Chinese households have gravitated towards real estate, operating under the assumption that it represents a secure avenue for their savings. The recent data raises significant concerns. Despite a significant deceleration in new construction, the inventory of available homes is on the rise, rather than experiencing a contraction.
