Chinese real estate debt crisis to intensify in 2022 | chinese economy

The crisis engulfing China’s real estate sector looks certain to intensify in 2022 as businesses face debt repayments in the New Year that are double those of the final months of 2021, risking what a Chinese expert calls a systemic crisis for the world’s second-largest economy.

Although concerns over stricken giant China Evergrande have subsided in recent weeks after a massive state-led restructuring, it missed a $ 255million (£ 190million) bond repayment on Thursday and Debt problems that drove the country’s second-largest developer to default are destroying many other businesses.

In total, Chinese developers owe $ 19.8 billion in offshore dollar-denominated debt in the first three months of 2022, analysts at Nomura said. That’s almost double the $ 10.2 billion they faced in the last quarter of 2021 – a burden that caused Evergrande to default and the threat of default from several other developers such as Kaisa.

There is also no respite in the second quarter of 2022, when they must find an additional $ 18.5 billion.

The burden of paying off bonds threatens to worsen the crisis for developers, who have benefited from a 30-year boom in the Chinese housing market on a business model of cheap credit and endless demand from the market. of the country’s huge upward mobile population.

But Xi Jinping’s anger at the industry’s excesses and his pursuit of “common prosperity” has led to a crackdown that has removed access to unlimited funding, and now key measures are signaling the end of the good times. Prices fell 0.3% in November, the biggest drop since 2015, while the value of home sales plunged 16.31% and new construction starts, as measured by floor area, fell 16.31%. fell 21.03%. Importantly, the Chinese population is shrinking with the number of marriages – and hence the demand for new properties from young couples – down 31% in the six years leading up to 2019.

“Everyone made the same bet”

Michael Pettis, a finance professor at Peking University, says the situation could turn into a systemic crisis that undermines the entire debt-ridden economy – the subject of nightmares for Beijing’s politicians, who desperately seeks to prevent contagion from the real estate crisis that is hitting ordinary Chinese people. .

“Everyone made the same bet on the inexorable rise in property prices, in particular the developers, who leveraged to the end, paid too much for the land at auction and took as many real estate risks as they did. they could take it, ”he said.

“The problem, of course, is that house prices one day stop rising, because everyone has made the same bet, everyone’s balance sheet starts to collapse at the same time, and that immediately becomes a systemic problem. This is what happened in China.

Debts to foreign investors are not the only problem. Developers owe Chinese bondholders billions of yuan but, in addition, Nomura says they must also find 1.1 billion yuan ($ 172 billion) in backdated wages owed to construction workers before the start. of the lunar new year in early February. It has also been reported that workers at Evergrande subsidiaries in states such as Guangxi and Shanxi have gone on strike over unpaid wages.

“Failure to pay deferred wages could be severely punished by both central government and the local governments concerned,” Nomura analysts said. “There is a huge risk to the reputation of developers and builders who could not pay deferred wages in a timely manner, especially if social protests are triggered. “

Evergrande’s woes became evident in September when he admitted he couldn’t meet his most urgent of gigantic $ 300 billion debts or even complete the 1.6 million homes for which he had. already supported the payment. After many maneuvers on the brink, he made some of his payments, but finally slipped into default in early December, which was later confirmed by downgrades from rating agencies.

The prospect of civil unrest over unpaid wages, unfinished houses and the uncertain return of wealth management products put in place by developers is at the center of Beijing’s battle to contain the fallout from the problems in the real estate industry.

“This is a test for China”

Although Evergrande chairman and founder Xu Jiayin this week vowed the company was going “full steam ahead” to complete the homes customers had paid for, Shasha Dai, editor of the credit reporting provider , data and analysis Reorg in New York, said the Chinese government was “deeply involved” in the restructuring of Evergrande and that the number one priority was to maintain “social stability.”

The government “was putting a mold around Evergrande” to make sure its problems didn’t spill over to other developers, she said. The goal was for a “reputable” person to come with access to finance, complete buildings that Evergrande didn’t complete, and put people into homes they paid for.

“Maintaining social stability is the government’s number one priority. They can’t protest with people going to offices demanding a refund – that’s a bad image. Home buyers should get what they pay for.

However, the spiraling nature of the problem could make it impossible even for Beijing, with all its levers of control, to contain given that so many developers could be in trouble. A report released in October by S&P, for example, said that a third of listed Chinese developers could experience liquidity issues over the next 12 months.

As Professor Pettis says, the crisis has deep roots and will not be easily resolved.

“These are not ‘bad apples’ or even bad policies,” he said, “so it cannot be solved by firing the right people, putting some in jail and improving policy responses.”

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The impact will be felt everywhere if the contagion spreads, especially on China’s reputation for sound economic management. Tim Symes, partner at international law firm Stewarts in London and specialist in insolvency and asset recovery, said the restructuring of Evergrande could take years. But the larger question for China was important.

“This is a test case for China and could shape risk appetite globally, affecting foreign investment.

“It’s going to run and run and the fear is that China is favoring its local creditors. Offshore bondholders will feel the loss and it will reverberate around the world. It makes people understand the risks of lending to China.”


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