China’s property market runs out of steam as millions demand their money back
The police are on guard outside the Evergrande headquarters in Shenzhen
A line of 60 uniformed security guards stretched across the entrance to the gleaming Shenzhen Tower of ailing Chinese real estate giant Evergrande on Monday as dozen angry investors demanded answers - and their money - from the company.
The protesters who claimed to have been "cheated" represent only a fraction of the estimated 1.5 million people who have pumped cash into Evergrande to buy homes that have yet to be built - and may never be built.
Evergrande, founded in 1996 by well-connected billionaire Xu Jiayin, experienced an urban real estate boom that is now losing momentum and hovering under a debt of $ 300 billion. The company had to turn down impending bankruptcy, but rating agencies are predicting default while domestic banks and foreign creditors are hooked, fearing a “Lehman moment” for the world's second largest economy.
"Right now, there is an incredible amount of people in China paying for property from what looks like it is stalling," said Mark Williams, chief economist for Asia at Capital Economics.
While the Evergrande crisis hit the headlines, the ingredients for a Chinese real estate bankruptcy have taken a long time. As early as 2016, the Chinese President Xi Jinping warned against a possible approach with the sentence "Property is there for life, not for speculating".
This message belies the wall-to-wall billboards, television, and even elevator advertising that lure buyers to invest their money in real estate, a depicted safe option in an underdeveloped financial market that offers relatively few alternatives for investment. Amid higher savings rates and an economic boom, it's common to buy real estate years in advance in cash and real estate - the more the better - to be a status symbol.
Iris Pang, ING's chief economist for China, says, “It's a culture deep in the minds of the Chinese, if not all Asians. Look at Hong Kong, look at Macau. Singapore is a bit different because they have a very generous public housing policy. But across Asia, home ownership is a kind of self-awareness, a safety net for people's lives or retirement. "
A real estate boom fueled by Beijing
The strong demand has resulted in average Chinese house prices at a staggering 18 times the median income in a private property market that didn't even exist before the turn of the millennium. However, this was also fueled by Beijing's regular real estate investment, a sector that directly accounts for around 15 percent of the Chinese economy, as a short-term growth drawer in times of economic turmoil. Businesses have upgraded with the blessing of the government.
Despite vacancy rates of over 20 percent, the tendency towards overbuilding in a country of party officials who want to show rapid regional growth - and their next promotion - is also behind the phenomenon of "ghost towns": urban areas filled with half-finished concrete shells.
Deleveraging was slowed by the trade war and then the pandemic. Last year it picked up pace with Beijing's release of the "three red lines" for developers, which imposed strict new limits on liability as a percentage of assets, gearing of less than 100 percent and enough cash to cover short-term debt.
According to the rating agency Standard & Poor’s, at the beginning of 2021 only a fraction of the domestic developers or only 6 percent adhered to the rules. Meanwhile, this year authorities have stepped up efforts to contain house prices through measures such as house purchase restrictions and higher mortgage rates.
Impending demographic crisis
The move to curb Evergrande and his ilk will only add to the downward pressure as the communist leadership keeps an eye on social cohesion and a worsening demographic crisis.
China's population grew the slowest since the 1950s in the decade through 2020, according to the last official census released earlier this year. Meanwhile, the legacy of rapid economic development and a one-child policy abandoned in 2016 means the country is likely to have one retiree for every two workers by 2050, compared to one in ten dependency ratios in 2000.
Jonathan Ashworth, a China economist at Fathom Consulting, says real estate investments have historically been a “great vehicle” for growth, but adds, “You have come to a point where prices in Chinese cities are just so high are, so the big issue here is inequality. You feel like you have to do something. On the demographic side, concerns among the authorities have really increased. It is widely believed that such high house prices reduce people's willingness to have children or have more than one child. "
The move of the Chinese population to the cities is also expected to slow down, catching up with developers who have been preparing for further expansion.
Ashworth adds, “The prospect for sales is much weaker than [the developers] thought. So they have all of this debt that they built up in the expectation that they could expand and expand. "
As new home prices slow to their lowest level in five months, the sector's bad debts have also increased. This has raised concerns about financial contagion as well as the impact on the global economy of a slowdown in the country's real estate sector, which consumes around a quarter of the world's iron ore.
But Williams says a Lehman Brothers-style moment is unlikely, citing the People's Bank of China's 2019 bailout of the failed Baoshang Bank as a “playbook” for bank intervention: “They had a chance to go to 2007 look and they wouldn't make the same mistakes. They had a kind of trial run of how to deal with the stresses of the banking sector. "
The most likely government reorganization for Evergrande, which Pang classifies as “too big to fail”. “It has to be about survival,” she says.
However, this may be a painful experience for the Chinese buyers who have poured billions into Evergrande, as well as the overseas investors who have weaned the Chinese economy from their hunger for real estate.
Additional reporting from Sophia Yan
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China Evergrande informs about the commitment of financial advisors
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