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IF Insights: Will China’s ‘Housing Bloodbath’ end finally?

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The housing sector crisis is affecting China’s banking system, which holds four-fifths of the country’s financial assets including most of the bonds

On 3rd October 2023, shares in crisis-hit Chinese real estate giant Evergrande saw a jump as stock trading in the crisis-ridden venture resumed after being suspended in Hong Kong.

The property giant defaulted on its debts in 2021 and triggered a crisis in China. The business, since 2022, has been facing regulatory suspensions in the share market.

In August 2023, Evergande’s shares plunged by almost 80% when trading resumed after a suspension of over a year and a half. In fact, Evergrande’s stocks have fallen by almost 99% since July 2020, so the latest trading jump has come as a respite for the beleaguered property giant.

Why We Are Talking About Evergrande?

Evergrande, once China’s top-selling property developer, has been struggling under the weight of over USD 300 billion worth of debt. In September 2023, Evergrande’s flagship Chinese business Hengda Real Estate was unable to sell its new debt due to the regulatory heat. The company’s plan to renegotiate agreements with its bondholders is facing headwinds too.

Evergrande had to file for bankruptcy protection for its United States-based assets.

Evergrande is also facing an October 30 court hearing in Hong Kong on a winding-up petition which could result in the venture going into liquidation.

Meanwhile, another Chinese property giant Country Garden secured an extension to a key debt payment deadline in September 2023.

The Crisis Is Affecting The Broader Economy Too

The housing sector crisis is also affecting China’s banking system, which holds four-fifths of the country’s financial assets including most of the bonds.

As per a New York Times report, during the last winter, China’s central bank, the People’s Bank of China, conducted a stress test on the balance sheets of the country’s 20 largest commercial banks, amid the real estate bloodbath. Although the banks were found to be resilient against the crisis, still they required additional capital to meet the international standards for keeping the money in reserve.

China is now reportedly looking to spread out the cost of handling real estate losses, which will allow the banks to use potential future profits on other loans to offset losses on loans to property developers.

Nearly half of real estate-related lending in China now consists of residential mortgages, which are ‘nonexistent’ as homeowners pay them on time. Banks charge interest rates on these loans to keep their revenue flow steady. The Xi Jinping government is now urging the banks to help the debt-ridden households by reducing interest rates on mortgages, but the lenders are in no mood to do that.

However, these banks have also been financing the local governments’ infrastructure push. The financed capital is used to buy land at local governments’ auctions and currently, the property industry biggies like Evergrande and Country Garden have been registering financial bloodbath, while waiting for state-level bail-out assistance.

Data provided by property agents and private agencies and accessed by Fortune magazine show that existing home prices have been falling at least 15% in prime neighbourhoods in Shanghai and Shenzhen, as well as in over half of China’s tier-2 and tier-3 cities.

Cities which were considered resilient against a housing downturn are now facing a property price slump, according to a July report by property research institute Leyoujia.

According to Standard and Poor’s, over 50 Chinese real estate developers have failed to make payments in the last three years. The crisis has also affected the country’s small and medium enterprises dealing in furnishing, tiling, and painting among others feeling the pinch. The oversupply of homes has impacted the demand for cement and steel as well.

As per the government data, by the end of August 2023, the combined floor area of unsold homes stood at 648 million square metres (7 billion square feet). As per a Reuters’ calculation, this estimate was equal to 7.2 million homes, based on the average home size of 90 square metres.

As per the S&P, project delays and empty homes have resulted in the material suppliers not getting their full contract payments.

As per the independent reports, consumer confidence is eroding rapidly, amid China’s faltering post-COVID recovery, as families now prefer tightening their spending patterns. Also, Beijing’s move of halting publication of key economic data including unemployment statistics has now prompted companies (including property giants) to recalculate their business plans.

In 2020, as COVID hampered economic activities in China, the Xi Jinping government announced the “three red lines” policy, where the property developers were asked to follow three fixed ratios (liability less than 70%, debt-to-equity ratio lesser than 100% and more than one cash-to-short-term debt ratio) to get access to more credit. In short, having enough cash to support businesses was put as a condition for the property giants to access government credit.

Over half of China’s top developers failed to meet the requirements and now they can’t borrow money from domestic banks too. In fact, foreign banks having huge exposure to the Chinese real estate sector have tightened their lending too.

Now, the urban population growth rate in China too has fallen. From 4.1% in 1996, it fell to 2.1% in 2020. The ratio of the older population is rising as well.

The government has introduced two relief measures since November 2022, but none of them have worked so far.

According to government data, China’s GDP growth slid to 0.8% in the three months ending in June 2023, down from 2.2% in January-March. The unemployment rate, as per reports, among urban workers aged 16 to 24, spiked to a record 21.3% in June 2023.

As per He Keng, a former deputy head of the statistics bureau, the number of vacant homes in China is so big that even 1.4 billion people won’t be able to fill these spaces. The real estate developers now don’t have capital access to complete their projects, nor can they clear their debt obligations.

The Road Ahead

Real estate sales in China increased in September 2023. Just a month back, new property sales by China’s 100 largest developers grew 17.9% from August to 404.3 billion yuan (USD 55.4 billion), following two straight month-on-month declines.

JPMorgan in September 2023 also revised its estimate for China’s 2023 GDP growth projection from 4.8% to 5%. There is hope that maybe the world’s largest economy is finally showing signs of a rebound as the manufacturing sector returns to profits in August, as it surged 17.2% from the corresponding period in 2022.

In August 2023, Beijing allowed China’s largest cities to reduce minimum down payments for homebuyers and encourage banks to lower rates on existing mortgages. And now property sales have witnessed an uptick.

Will the ‘Housing Sector Bloodbath’ end at last? Let’s wait for the answers.

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