A sharp fall in the shares and bonds of Country Garden, one of the China’s largest property developers, due to worries of its repayment ability, indicates a deepening crisis in China’s property sector. Other high-profile debt burdened Chinese companies, including Dalian Wanda Group and state-backed Sino- Ocean have also witnessed sizable sell-offs. Chinese real estate giant KWG Property has defaulted on multiple loans.
In a statement that augurs poorly for the already embattled Chinese property market, China Ever Grande, the global real estate industry’s most heavily indebted property developer, triggered the crisis in China’s real estate market. It was recently reported that its debts rose further to about USD 340 billion by the end of last year. In order to manage its swirling debts, the company offered its creditors a choice of replacing existing debt with new bonds maturing in 5- 12 years or swap debt for shares of the developer or its units in other sectors.
According to analysts at ANZ, the crisis in the property market could deepen in coming months as the sector faces repayment of USD 12.8 billion in dollar- denominated bonds this year. JPMorgan estimates expects USD 9 billion of defaults this year. This does not include Country Garden, which has over USD 40 billion of debt.
A report by Fitch Ratings has pointed out that business in the secondary-home market has also been low with a fall in the number of listed-for-sale homes, lower asking prices and fewer transactions, indicating that the home buyer’s confidence remains low amid an uncertain economic outlook and weak employment prospects.
A growing crisis in the property market is also set to impact the banking sector. Since 27% of all loans of Chinese banks are related to property market, including mortgages, default by companies could leave the banks burdened with significantly more non-performing loans. Logan Wright, a Hong Kong based partner at consultancy Rhodium Group, has labelled the situation as a ‘slow- motion financial crisis’.
Since a major source of revenue, nearly 40%, for the local governments from land sale proceeds, a decline in revenue receipts could lead to the local governments cutting public services. Moreover, since 60% of the total assets owned by urban Chinese households is property, a sharp decline in property prices could lead to social unrest with there falling income.
Already in an act of dissent against the Chinese leadership, some home owners are refusing to pay mortgages until their apartments are completed. In a recent paper, Oxford Economics stated that mortgage boycotts, driven by deteriorating attitude about property are a grave danger to the financial condition of the sector.
As the crisis in the property market deepen, the local government financing vehicles (LGFVs), are also running short of funds or are on the brink of unprecedented defaults on local bonds. If LGFVs default, it would lead to unprecedented crisis in the economy, as they sit on USD 7.8 trillion of debts.
Many cities are trying to revive their housing markets by reducing the monthly debt payment and enlisting more elderly people into the pool of home buyers. Some banks in the cities of Nanning, Hangzhou, Ningbo and Beijing have extended the upper age limit on mortgages to between 80 and 95.
The persistent crisis in the Chinese market has discouraged investors. According to official data, investment in property development fell 7.9% in the first six months of 2023, compared with a 7.2% decline in January-May, though the actual fall is likely to be higher.
The property market in China, one of the main contributors to GDP, has been on a downward spiral since the COVID pandemic and the government steps to rein in unsustainable debt. A growing number of Chinese property developers are facing financial strain, while property sales and home prices in China are falling sharply.
According to Goldman Sachs, the beleaguered Chinese property market is set to impede economic growth in the short term due to persistent weaknesses. Property and related industries account for 25-30% of China’s GDP. As China experiences a demographic shift due to slower population growth and urbanization, demand for housing is also not increasing, further impacting economic growth. The Chinese economy is at a crossroads, and the crisis in the property market indicates looming trouble for the economy. According to Oxford Economics, though any government intervention in real estate and infrastructure may boost growth in the short term, it is not ideal for China’s longer-term growth since it forces the government and the financial sector to support an unproductive and failing real estate industry.