It wasn’t so long ago that times were great. Ye, now in his early 40s, started a foundation company in southern China in 2010, and was able to take advantage of China’s post-financial-crisis construction boom – when it turned to heavy infrastructure investment to lift the economy. Piling is a technology that lays deep foundations for any form of construction work, including buildings.
At the time, all the players – including local governments, developers, suppliers, and buyers – were engaged in frantic land buying, construction, and real estate trading. For me, the future looked particularly bright in 2017, when it registered a partnership with real estate giant Evergrande.
China’s real estate sector is facing reckoning with the problems of Country Garden and China’s periphery
China’s real estate sector is facing reckoning with the problems of Country Garden and China’s periphery
“A large number of suppliers to developers, like myself, are deeply besieged by the crisis,” Ye said, lamenting that the vast majority of his wealth was wiped out in just two years.
In early 2022, Evergrande chairman Xu Jia’in announced a target of delivering 600,000 homes that year — “equivalent to approximately 50 per cent of its residential developments already sold”. But according to the company’s latest update on August 25, Evergrande has only delivered about 301,000 homes in 2022.
Unlike developed markets where second-hand homes dominate the market and properties are largely sold on completion, the vast majority of new Chinese properties are often sold before construction begins.
Concern has spread that previously sold homes may not be completed, due to the slow pace of progress. China Business News, a state-backed newspaper in Shanghai, reported that a third of pre-sold unfinished homes slated for September 2022 had been completed by May this year.
Breaking down geographically, the birth rate was 56 percent in southern China, 40 percent in the east, 15 percent in the southwest, and 16 percent in central China.
With no light at the end of the tunnel two years after the emergence of the Evergrande debt crisis, analysts warn that Beijing needs to take immediate action – or perhaps an entirely different approach – to prevent contagion and fears from spreading.
“Ensuring the delivery of unfinished real estate units is [one of] “The measures Beijing has taken to protect consumers, homebuyers, to prevent this from becoming a broader social problem,” said Raymond Young, chief economist for Greater China at ANZ Bank.
And while economic concerns weigh on spending, China says it has plans to make goods cheaper
And while economic concerns weigh on spending, China says it has plans to make goods cheaper
Beijing has taken some steps to maintain social stability and prevent a banking crisis. In June, the central bank extended re-lending quotas by 200 billion yuan to ensure completion of unfinished real estate units and allow commercial banks to roll over outstanding loans after the Evergrande crisis, extending the policies until the end of next year. The policy changes also aim to increase bank lending. Beijing and local authorities have sent special teams to supervise the operation.
This approach differs markedly from that seen in the US, which in 2008 chose to bail out Fannie Mae and Freddie Mac, two of the largest providers of mortgage loans, through market-oriented financing injections and restructuring.
“the [Chinese] “The government should follow laws and regulations and conduct a cost-benefit analysis to measure the actual impact on jobs and the national economy,” Young said.
Speaking at a public forum in Shenzhen last week, Yao Yang, a Chinese economist and dean of the National School of Development at Peking University, said the current downturn in China’s real estate sector was caused by government policies, not the real estate sector itself.
He called on the authorities to abandon restrictive measures on real estate credit. Second, bankruptcy and reorganization procedures should be implemented for developers with capital outflow problems.
“Now the debt is hanging in the air. Some big companies are too big to fail, but this drags their suppliers to death.” Yao was quoted as saying.
Thirdly, Yao added, the authorities should resolutely stop interfering in market dealings and falling house prices.
In a research report released Thursday, Gavekal Dragonomix said: “In the financial sector, moral hazard constraints explain why regulators will not bail out distressed developers, and may not fully compensate investors’ losses in riskier investment products, after years of warnings.” “.
Fitch Ratings says the outlook for Chinese developers is “deteriorating”, citing a lack of improvement in access to financing for private developers and weak homebuyer sentiment. However, it says the outlook for many state-owned developers is stable.
“Sales of most struggling developers are unlikely to stabilize in the next few years, while pressure on overall sales may continue without a strong policy response,” analysts Lan Wang and Duncan Innes Kerr wrote in a credit briefing last week.
As China’s debt risks mount, the specter of looming domestic crises looms large
As China’s debt risks mount, the specter of looming domestic crises looms large
Peter Berezin, global investment strategist at BCA Research in Canada, warned that China’s housing market looks even worse than Japan’s in the early 1990s.
“In terms of the leverage attached to real estate developers, China looks worse. In terms of the potential for demographic decline, China looks very bad.” “So the question then is what will China do to close this spending gap that the housing market has? It was the same question Japan had in the early 1990s, and they didn’t have a good answer.
In the first seven months after China ended its tough coronavirus restrictions, Country Garden’s sales fell 35 per cent, year on year, and operating cash flow dried up.
Behind the giant private sector companies are dozens or even hundreds of smaller private companies that have also been dragged into the debt crisis. But the local authorities are unable to provide additional funding due to their slow fiscal revenues seen during the pandemic.
“Actually, it is difficult for us to get the arrears, because many contracts signed with Evergrande have been voided and rejected by local governments,” said Raymond Zeng, another supplier.
Despite Beijing’s pledge to ensure timely payments to small and private companies, those payments owed by Evergrande became exceptions, after the government intervened to resolve its crisis.
Similarly, Cheng, who is also a pile driver, has seen his fortune plummet amid the real estate crisis.
To make matters worse, his credit standing has been damaged because he has defaulted on payments to third parties, which means he is now prohibited from borrowing money, using a credit card or even buying an airline ticket, according to China’s social credit system.
“I was a private and successful businessman,” Cheng said. “But now I’m making preparations for the worst – bankruptcy both on a personal and corporate level.”
Meanwhile, with many homebuyers still anxious about handing over their pre-purchased properties, measures taken by Beijing to ensure fast delivery times appear to be paying off.
And in the first half of this year, China’s 50 largest developers completed and delivered more than 2.02 million pre-sold homes, state media reported last month.
As China reports a real estate boom, can ‘risky’ real estate drive growth?
As China reports a real estate boom, can ‘risky’ real estate drive growth?
Country Garden said the company delivered 700,000 previously sold housing units last year and plans to complete another 700,000 units this year. It delivered 278,000 units in the first half of the year, according to its statement in July.
But entrepreneurs Cheng Wei expressed doubts that the newly introduced policies would have a practical effect, and were concerned that implementation and governance were fraught with arbitrariness on the ground.
“So, how can the authorities bring certainty to investors and the market?” Yi asked.
They fear that if the Country Garden crisis worsens, it could deal a huge blow to market confidence and the debt chains between the country’s developers and their suppliers.
“There is a huge oversupply of homes, especially in fourth- and fifth-tier cities. Moreover, not everything can be known in the future, such as how much real estate prices will fall, in which direction policies will change, and whether the business environment for private companies will continue to deteriorate.
The financing environment for private developers has not improved significantly
China Real Estate News, a newspaper influenced by the Ministry of Housing and Urban-Rural Development, published an editorial on August 20 arguing that domestic stimulus measures have failed to produce visible results because fundamental issues of supply and demand have not been addressed. .
“The financing environment for private developers has not improved significantly. A large number of those who have already reported default are now still struggling, while many others are gradually slipping to the brink of risk because of the market downturn,” she warned.
Meanwhile, the state-run publication warned that the market outlook is precarious – with household consumption weak while restrictions on purchases, loans and prices remain tight in some cities.
“Policy support should start with ensuring developers’ cash flow and delivery of pre-sold units; easing administrative interventions; and lowering home-buying costs, including down payments, taxes and sales prices.
Additional reporting by Frank Tang and Candy Wong