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China Evergrande, once the largest property developer in China, now holds the title for being the most indebted. The default of this company has triggered the ongoing property crisis in the country.
Although Evergrande has promised to restructure, it offers little reassurance when the entire real estate sector faces a crisis that could jeopardize the stability of Chinese finance.
Evergrande recently filed for Chapter 15 bankruptcy protection in New York, while restructuring proceedings are also taking place in Hong Kong and the Cayman Islands.
While seeking some breathing space, Evergrande has announced multiple restructurings in the past. However, since defaulting on its dollar-denominated debts in 2021, the business environment has worsened.
Despite aggressive policy easing by the People’s Bank of China, the downward trend continues. Country Garden, the largest and previously healthiest developer in the country, is now approaching its first default.
China’s home prices have been declining for two years, reducing the incentive for homebuyers to continue paying mortgages for unfinished properties.
Reportedly, homebuyers in over 100 cities stopped making mortgage payments last year, and prices have continued to fall since then. If more individuals cease paying their debts, it could trigger a catastrophic chain reaction for local developers and banks. Unfinished homes back more than $200 billion in estimated mortgage loans.
Considering Evergrande’s liabilities exceeding $300 billion and projected losses of $80 billion for 2021 and 2022, one would expect more aggressive support from the Chinese government in such a crisis.
However, Beijing is currently incapable of bailing out its developers or banks. Recent official data has shown significant weaknesses, indicating a faster deterioration of the economy than anticipated.
In response to the renminbi’s weakening, the central bank took its strongest measure yet by fixing its daily reference rate. This demonstrates the severity of the situation. The outlook for Evergrande and the wider Chinese property sector appears grim.
The Lex team welcomes readers to share their thoughts on the Chinese property crisis in the comments section below.
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