Alarm bells ring as China property cancer spreads

Among those developers are China Evergrande, the world’s most indebted property developer, with about US$300 billion ($430 billion) in liabilities, and the company that defaulted on its foreign bonds last year bringing home the scale of the crisis in China’s property sector.

Its suppliers want to be held accountable for their loans, which may be problematic given that the group has not yet developed a workable restructuring plan and risks being declared default on its domestic bonds by domestic investors who have, until now, been prepared to extend the grace period.

Evergrande has until the end of this month to work out its plans and prevent what would become a landmark default in China.

Borrowers for incomplete apartment developments in China refuse to pay their debts, exacerbating the existing crisis in China’s vital property sector.Credit:Bloomberg

Its ability to meet that deadline was complicated by the forced resignations of its chief executive and chief financial officer last week following an investigation into circumstances in which some $US2 billion of deposits in Evergrande subsidiaries were used as collateral for loans by third parties, some of which have not paid off.

The crisis in the property sector, which accounts for about 30 percent of China’s GDP, is one of China’s own doing.

It was Beijing’s decision to crack down on leverage in the sector with its “three red lines” policy setting limits on developer debt ratios that sparked a crisis that saw some 30 of China’s top 100 developers default on their foreign loans. More failed this year.

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Despite the efforts of the authorities to encourage restructuring, and their insistence from banks and local governments to provide funds to stabilize the sector and restart the level of development activity has fallen dramatically. Property sales this month are tracking more than 40 percent below their current levels last year.

Given the central role property plays in China’s economy and the coincidence of the property crisis with the lockdowns flowing from China’s “zero COVID” policy, it may come as no surprise that China’s GDP growth slumped to 0.4 percent in the second quarter.

The risk for authorities is contagion, and not just from boycotting lenders or even spreading the movement from suppliers to developers.

Evergrande’s failure on foreign bonds last year brought home the scale of the crisis in China’s property sector.Credit:Bloomberg

While losses stemming from completed or unstarted construction may be bearable, the dire effects of such projects, shrinking new development activity in the sector, falling property prices and COVID-related losses of many borrowers’ income will have on the attitudes of existing homeowners. and would-be homeowners and investors can generate a destructive cycle that triggers a full-scale property and banking crisis.

The Chinese authorities, of course, have more leverage at their disposal to prevent a crisis than their more democratic counterparts.

Silencing discussions about boycotting pawnshops are examples of one lever, directives to banks and local governments and the creation of bailout funds to help other developers.

The authorities can, and almost certainly have, instruct domestic lenders to show developers some patience.

If those lenders lose their temper (or their own financial capacity to continue to defer repayments) and Evergrande defaults on domestic bonds, it will create a dangerous moment for the authorities.

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There is a risk that the (unusual for China) action of pawnshops and suppliers comes shortly after depositors at a number of BPRs tried earlier this month to protest the freeze on their deposits since April (protests that ended when they were attacked). by plainclothes police) could turn into a broader reaction to the loss of wealth that occurs when property values ​​plummet.

With property accounting for nearly 80 percent of China’s household wealth, the authorities’ inability to stabilize the sector threatens domestic spending, economic growth and social unrest in a year in which authorities should focus on stability ahead of Xi. Xi’s unprecedented “election” to a third term as party president and supreme leader later this year.

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