With a Hong Kong court ordering on January 29, 2024, the real estate giant of China Evergrande to undergo liquidation following a failed effort to restructure $300 billion in debt owed to banks and bondholders, it is clear that the crisis in the real estate sector in China is far from over.
With the growth rate in the Gross Domestic Product in China restricted to only 5.2 percent in 2023 amid mounting concerns, waning investor confidence and a protracted property market slump, it is evident that there is no chance of an immediate recovery either in the real estate sector in China or of the Chinese economy. In this situation, the assertion made by U.S. Secretary of State Antony Blinken in Davos on January 17 that India’s is an “extraordinary success story’ will not be music to the ears of Beijing.
In fact, in the face of the crisis in Evergrande, the world’s most heavily indebted real estate developer, Beijing has been forced to roll out new rules meant to expand access to commercial bank loans for property developers. Thus, Beijing has been left with a choice between the frying pan and the fire as the real estate developers in China, in the first place, had been restricted from resorting to too much borrowing to keep indebtedness within limits when the economy was not performing. The mandarins of the Communist Party of China are now groping for a way out of the crisis.
Hong Kong judge Linda Chan has said it will be appropriate for the court to order Evergrande to wind up its business, given a “lack of progress on the part of the company putting forward a viable restructuring proposal,” as well as the insolvency of Evergrande; a dramatic reversal of fortune indeed. Even six years ago, Evergrande was riding high, pre-selling apartments to middle- and upper-income Chinese citizens.
In fact, China Evergrande is one of the biggest of a series of Chinese developers that have collapsed since 2020 under official pressure to rein in surging debt which the Communist Party of China considers to be a threat to the Chinese economy in view of the slowing down of the growth rate. A crackdown on excess borrowings has pushed the property industry in China into a crisis. Scores of developers have run into trouble. This, too, is dragging down the economy of China.
There is a ripple-down effect throughout financial systems, not only in China but even outside. The international financial market had been rattled by the fear that Evergrande going into liquidation would cause global shockwaves. The crisis has, however, been avoided because only a few billion dollars of the debts of Evergrande were owed to foreign creditors. The threat to the financial system in China as a consequence of the liquidation order, however, hangs like the Sword of Damocles.
In December 2023, Evergrande gained a reprieve from the same Hong Kong court after it submitted it was attempting to “refine” a new debt restructuring plan of more than $300 billion in liabilities. Lawyer Fergus Saurin representing an ad hoc group of creditors went on record on January 29, 2024, in an AP report from Hong Kong that he was not surprised by the outcome of the hearing. “The company has failed to engage with us. There has been a history of last minute engagement which has gone nowhere.”
Evergrande first defaulted in meeting its financial obligations in 2021, just over a year after Beijing had clamped down on lending to property developers in an effort to cool the property bubble. The spectacular growth of the Chinese economy of the past two decades, the subject of discussion in international circles, was in fact like a giant with feet of clay. The economic boom of China had been driven by the real estate sector. Developers had borrowed heavily as they turned cities into forests of apartments and office towers. This had pushed the total corporate, government and household debt to the equivalent of more than 300 percent of the annual economic output; a figure unsustainable for a middle-income country.
The shadow banking industry of China that comprises institutions providing financial services similar to banks but operating outside the banking regulations, have also been affected as a consequence of the crisis in the real estate sector. Zhongzhi, such a financial institution that used to lend heavily to developers, has also declared insolvency.
The new rules announced by the People’s Bank of China, the National Financial Regulatory Administration and the Finance Ministry on January 24, 2024, are meant to expand access of property developers to loans from commercial banks. This will allow real estate companies to use bank loans pledged against commercial properties such as offices and shopping malls to repay their other loans and bonds and to cover the operating expenses.
It is uncertain however to what extent the new rules will help the real estate sector in tiding the crisis. It has been pointed out that the latest policies are not a full reversal of the efforts to rein in debt and control risks in the property industry. The new rules say that bank loans cannot be used to buy commercial housing or rental housing or to start new construction or to buy land. Loans cannot exceed 70 percent of the appraised value of the property being used as collateral and should generally last a maximum of 10 years, with an absolute limit of 15 years. Banks have been asked fully to conduct due diligence before and after loans are issued to mitigate and minimize risks.
It is unlikely that the new rules will have a noticeable impact on the overall crisis gripping the property market in China. Sale of land to property developers for the construction of housing has for long been a major source of revenue for local governments which are now grappling with the problem of mounting debts. At the same time, the incomplete construction of new apartment buildings has hit contractors and suppliers of construction materials and home furnishings hard.
Economists have also pointed out that the pace and potential size of loans remains uncertain as banks are likely to watch the commerciality and risks of such loans. Meanwhile, the sale of new houses and real estate prices continue to fall; discouraging consumers from spending. Chinese families typically have much of their wealth tied up in property. A fall in the price of real estate tends to erode their net worth.
The plight of the Chinese economy has come to such a pass that even a GDP growth rate at 5.2 percent in 2023 is being held as a rebound; a sad commentary for an economy that has boasted of double-digit growth over decades. Head of the National Bureau of Statistics of China Kang Yi has admitted, however, that the Chinese economy continues to face difficulties and challenges.
“On the top of economic growth, other requisites for a confidence boost include a stable property market, receding deflationary pressure and less policy unpredictability,” Chief Economist for Greater China at Citigroup Yu Xiangrong has said. Investment in property fell by nearly 10 percent in 2023, according to data. While the National Bureau of Statistics claims that the unemployment rate in China is only 5.2 percent, unofficial data put the figure at an astoundingly high 21 percent. The NBS data says the rate of unemployment in the age group of 16 to 24 years was 15 percent in December 2023 but the figure would be much higher if youths who are in school are counted. The figure of 15 percent really reflects youths who are in need of a job after graduation.