2023-10-21 21:30:00
The real estate crisis in China is escalating
Evergrande is on the verge of liquidation, Country Garden has just missed its payment deadline, and China Oceanwide is being liquidated – an industry collapse is getting closer and closer.
Real estate developers are threatened with liquidation: people in a square in front of Evergrande residential buildings in Beijing.
Photo: Roman Pilipey (Keystone)
The bad news from the Chinese real estate sector continues. The two real estate giants Evergrande and Country Garden are collectively saddled with debts of more than $550 billion. Investors fear a collapse of Evergrande, the real estate developer Country Garden According to recent reports, it is facing insolvency.
There is a lot of trouble in China’s real estate sector. Foreign investors are becoming increasingly nervous. The structural crisis in the real estate sector is more serious than long suspected and has escalated in recent weeks. Evergrande has been struggling with a huge mountain of debt for two years, liquidity bottlenecks and insolvency. Stocks and bonds have been on the decline for months. For 2020 and 2021, the group suffered losses of $81 billion.
The arrest of Evergrande founder Hui Ka Yan caused additional unrest. He has been under house arrest since September. Why is unknown. The New York Times suspects criminal actions by the top manager. The 62-year-old billionaire from Guangdong was considered to be well politically connected and was named by the US business magazine Forbes in 2017 as having a fortune of $45 billion named the richest man in Asia. Hui is now believed to have lost more than 90 percent of his assets.
Evergrande is facing 2,000 lawsuits. A fundamental restructuring of the group has so far failed. And new hurdles appeared. The Chinese stock market regulator opened an investigation into Evergrande and banned the real estate giant from issuing new bonds on September 12th. The rating agencies Moody’s and Fitch have downgraded the group’s credit rating.
Experts are openly speculating regarding an uncontrolled collapse of the seriously ailing company. On October 9, the restructuring of $19 billion in bonds that had been under negotiation for months was canceled at the last minute. The bondholders expect a collapse with catastrophic consequences for other construction companies.
Country Garden crashes
The second largest Chinese construction giant, Country Garden, is also in trouble. Country Garden is sitting on regarding $200 billion in debt and was unable to make interest payments to investors on a $500 million bond in August. The grace period expired on Tuesday, but the lenders received no money. Only a coupon of $15.4 million was due. Not a good sign.
The management had already warned several times regarding defaults on payments to foreign investors. Country Garden stock and bond prices are trending toward zero. The real estate giant has 3,000 construction projects across China, but many construction sites lie idle, property sales have collapsed and angry buyers who have already paid are left standing in front of half-finished apartments.
In the first half of 2023, Country Garden suffered a loss of $7 billion. This week the company had to deny reports that the company founder and his daughter had fled abroad. A “malicious rumor,” emphasized a company spokesman.
The construction sector makes up 25 percent of the Chinese economy and is therefore extremely important. Although China achieved economic growth of 4.9 percent in the third quarter of 2023, the housing market hardly benefited. In the first nine months of 2023, investments in the construction sector fell by 9 percent.
Country Garden was generally considered solid and received new credit lines from Chinese state banks last year. But sales continued to fall. By 81 percent in September alone. The Chinese central bank supported the domestic banks with liquidity of around 100 billion euros this week and is encouraging the population to buy new apartments, but so far without success.
The construction company Jinmao Holdings, a subsidiary of industrial giant Sinochem, also recently issued a profit warning, causing its share price to fall by almost 10 percent. China expert Ting Lu from the Japanese bank Nomura warns that “markets are still underestimating the followingmath of the Chinese real estate collapse.”
Only the construction company Sunac China Holdings managed to restructure its 9 billion offshore debt in September. In contrast, at the end of September, competitor China Oceanwide Holdings in Bermuda was sent into liquidation following defaulting on payments.
Real estate crisis hits shadow banks
The real estate crisis has consequences for the financial sector. The investment subsidiary Zhongrong of the asset manager Zhongzhi Enterprise Group has also missed interest payments due to investors. The financial group, which is one of the shadow banks, manages around $137 billion, has invested heavily in real estate, including at Evergrande, and had to admit to a liquidity crisis.
The $2.9 trillion shadow banking sector, known as trust banks, is likely to be hit particularly hard. For years they gave preference to regional and local loans when state banks refused. In addition, there is a huge mountain of debt owed by state authorities, which has reached around $9 trillion.
When faced with the threat of loan defaults from state banks, Chinese cities increasingly used shadow banking to promote urban development. Land was used as security for loans and the company’s own debts were packaged into tranches using financial vehicles and sold on. Until the construction boom came to an abrupt end.
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