Brain dead: China's embattled property giant on the road to nowhere

What was once a river of money has turned into a trickle as the Evergrande-triggered property crisis has spooked buyers, with a mortgage uprising – sparked in June by buyers of the unfinished Evergrande project – exacerbating already crushing pressure on developers.

Mortgages refused to service bank loans they took to buy their apartments and the protest movement that began with the Evergrande development has now spread to about 320 projects across China and led to central authorities setting up $64 billion to help developers complete their unfinished projects.

However, if Xi Jinping wants a smooth path to an unprecedented extension of the Communist Party’s leadership for a third term, Beijing may have to engage more directly and aggressively in the crisis.Credit:AP

Worryingly for Chinese authorities and banks, unpaid suppliers for the Evergrande project are also starting their own payment strikes which, if they spread as lenders’ actions have spread, would amplify the financial and economic effects.

Evergrande’s fate, already looking desperate, seems to be getting worse with each update.
Last month the chief executive and chief financial officer were forced to resign following an investigation into circumstances in which some $US2 billion of deposits in Evergrande subsidiaries were used as collateral for loans by third parties. That $US2 billion appears to have been seized by a third-party bank.

On Sunday, Evergrande said one of its subsidiaries had been ordered to pay loan guarantors from some of Evergrande’s entities about $1 billion for failing to meet its financial obligations. The subsidiary has pledged a shareholding in Shengjing Bank as collateral, which will now be sold and the proceeds taken by the guarantor.

When Evergrande’s woes became apparent last year as it struggled to conform to Beijing’s “three red lines” policy (essentially leverage limits) it spread contagion throughout the property sector and, with property activity accounting for about a third of China’s economy, across the economy.

Chinese developers – about 30 of the top 100 developers – have so far defaulted on about $US20 billion in foreign debt. Progress has been frozen, either incomplete or not even started and the revenue from pre-sales has dried up.

On Friday data on home sales by the top 100 developers was released showing sales fell nearly 40 percent in July compared with the same month a year earlier and nearly 29 percent lower than in June this year.

Mortgage boycotts, many developments that have been frozen incomplete and the impact of China’s “zero COVID” policy on incomes of potential borrowers have wiped out the level of activity in the sector.

The combination of the COVID lockdown and the boom in property sector activity was the main negative influence on China’s 0.4 percent GDP growth rate in the June quarter.

What was once a river of money has turned into a trickle as the Evergrande-fueled property crisis has spooked buyers, with the uprising by mortgages exacerbating already crushing pressure on developers.

So far the turmoil in the sector has not had a material impact on Chinese banks, which have reported less than $500 million in mortgage arrears.

Estimates by credit rating agencies and investment banks, however, suggest they could incur an estimated $500 billion in mortgage-related losses if the worst-case scenario of the property market unfolds.

Load

Authorities have yet to unveil their own plans to stabilize the industry, leaving that responsibility largely to local governments affected by the sector’s liquidity crisis. Local governments rely on land sales to developers for almost a third of their own income.

In order to stabilize the sector before the rapid flow of liquidity destroys the sector, large developers must be stabilized or liquidated on a regular basis so as not to create a deeper and wider financial crisis.

Given the nature of China’s political system and the authorities’ control over every aspect of the economy, that is possible despite the delay in recognizing and responding to the scale of the problem.

However, if Xi Jinping wants a smooth path to an unprecedented extension of his Communist Party leadership for a third term, however, Beijing may have to engage more directly and aggressively before the foundations of the country’s social and economic stability, already shaking, are balanced. waver.

#Brain #dead #Chinas #embattled #property #giant #road