Roving Periscope: Dark days ahead as China’s real estate bubble bursts

Virendra Pandit 

New Delhi: And, the wolf has finally knocked on the Dragon’s doors!

A year after China’s humongous real estate sector, which contributes as much as a third to the Asian nation’s GDP, came under a cloud, Evergrande, the biggest player in the property market has filed for bankruptcy, the media reported on Saturday.

This filing for bankruptcy by China’s real estate giant signals the beginning of Beijing’s financial crisis and severe reverses in the second-largest economy in the world.

Experts said Beijing’s three-decade-long obsession with the “growth-at-all-costs” model has led to the start of this meltdown as all financial practices were sacrificed at the altar of breakneck growth.

For three decades, Evergrande, once amongst China’s most successful real estate developers, gobbled up huge debt as the Asian nation’s economy exploded. Demand for housing was so strong, homebuilders often pre-sold apartment units to buyers much before construction was even complete. China is now full of ghost apartments no one is willing to buy or live in.

Two years ago, as China battled internal challenges because of the Covid-19 pandemic and external crises due to its trade war against the USA and security concerns on the Taiwan issue, a sudden shift in policy left the country’s property developers scrambling for cash, compounding financial risks.

Evergrande’s downfall started in 2021, when the Communist regime moved to curb excessive borrowing to try to slow the rise in home prices, effectively cutting off a major source of funding for property developers.

Evergrande, which had USD 300 billion in liabilities, couldn’t shore up cash fast enough to repay debt.

In December 2021, its default triggered a market panic. A spiraling wave of defaults followed, from which China’s vast real estate market could not recover. The developers suspended hundreds of projects, leaving many ‘pre-sale’ buyers without a new home and a hefty debt burden, the media reported.

Beijing’s attempts to restructure billions of dollars in offshore debts have massive implications for China’s entire financial system at a time when most major economies are facing economic crises worldwide.

On Thursday, Evergrande filed for Chapter 15 bankruptcy, which is a way for foreign companies to use US bankruptcy law to restructure debt. The process will take time, as Evergrande has around USD 19 billion in offshore debts.

The company’s liquidity crisis was just the beginning of the pain. Other large builders in China have also since defaulted as they struggle to shore up cash amid diminishing demand for housing.

Another real estate giant, Country Garden, which employs some 300,000 people, missed two payments on its multibillion-dollar debt and said it was considering “various debt management measures.” It has until early September to make the payments it missed.

The cash-strapped developer’s debt is now seen as a “very high risk” asset, according to Moody’s, which downgraded its rating on Country Garden last week, the media said.

The real estate sector accounts for over 30 percent of China’s economic activity, and more than two-thirds of household wealth is tied up in real estate.

Nearly three years of “Zero Covid” restrictions sapped China’s economic growth, and consumers have been reluctant to buy new homes in the face of higher unemployment and falling property values after China’s economic engines sputtered after a brief surge in activity earlier this year.

In July, China’s consumer prices fell for the first time in more than two years. The skyrocketing youth unemployment forced the Chinese authorities to withhold the July data. Retail sales, export demand, and factory production are all down as well.

While Beijing is making some efforts to help jumpstart demand for housing and free up cash for developers, the days of big, state-funded bailouts for bloated industries may be over.

“We must maintain historic patience and insist on making steady, step-by-step progress,” the media quoted President Xi Jinping as saying recently.