China Evergrande, a massive property developer, has filed for bankruptcy protection, marking a significant moment in the country’s real estate sector. This move comes over two years after the company defaulted on its debt. In the wake of Evergrande’s collapse, smaller developers have also faced defaults, indicating a gradual decline in China’s real estate industry that now poses a threat to the broader economy. Another major developer, Country Garden, is on the verge of its own default as it struggles with missed payments and a staggering $200 billion in unpaid bills.
Evergrande’s bankruptcy filing was made in the United States bankruptcy court in the Southern District of New York. The company is currently engaged in negotiations with its creditors in Hong Kong and the British Virgin Islands. It has stated its intention to proceed with offshore debt restructuring and is seeking approval from the U.S. court.
The fact that Evergrande is still in negotiations with its creditors highlights the slow-moving crash that the Chinese real estate market is experiencing. The housing sector, once a key avenue for wealth creation for millions of Chinese individuals, has slowed down due to government policies implemented a few years ago to cool the property market. Chinese leader Xi Jinping directed that homes should be primarily for living, not speculation. In 2020, the government further tightened regulations on borrowing, limiting real estate companies’ ability to raise funds and resulting in a series of defaults.
This policy shift has been a significant blow to a housing market that had previously thrived alongside China’s economic growth but had also been plagued by overbuilding and risky financial practices. Homebuyers frequently took out mortgages before construction was completed, providing developers with consistent revenue. However, as the market cooled, many consumers were left with debt and no finished homes to show for it. Evergrande alone had presold 720,000 incomplete apartments by the end of last year.
The troubles in the housing market are compounded by China’s overall economic struggles. The country’s economy, the second largest in the world, is grappling with the aftermath of three years of stringent “zero COVID” measures, which have impacted hiring, consumer spending, stock performance, and the willingness of potential homeowners to make purchases.
Analysts at Nomura described China’s property sector as experiencing an unprecedented correction. Country Garden, for instance, has already projected potential losses of up to $7.6 billion in the first half of this year. The company has yet to complete nearly one million apartments across various Chinese cities.
News of Country Garden’s financial turmoil has sparked anger among Chinese social media users, with some invoking the painful memory of Evergrande’s default two years ago. It is clear that the challenges facing China’s real estate market and the broader economy are complex and have far-reaching implications.
Contributors to this report: Alexandra Stevenson and Daisuke Wakabayashi.
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