CHINA’S REAL ESTATE CRISIS GROWS

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On 5 November, a unit of China’s debt-plagued Evergrande Group property development company made a last-minute, $83.5-million bond payment a day before a grace period was to expire.

We detailed the beginnings of the crisis in “China’s Real Estate Market Teeters on Evergrande Debt” (21 Sep 2021) and “Will Evergrande Dive Crash Chinese Markets?” (5 Oct 2021).

If the unit had missed the payment, the company would have been thrown into default.

However, the country’s overleveraged property industry continued to unravel last week, with Hong Kong’s stock market suspending trading in shares of homebuilder Kaisa Group Holdings and three of its divisions after a bond payment was missed.

Kaisa’s shares lost 15 percent of their value on 4 November, falling to an all-time low. 

The company has had trouble raising cash after its credit rating was downgraded and China’s property market slumped, it said.

Kaisa has put property management business Kaisa Prosperity and two residential developments up for sale, Reuters reported.

The troubled company also is auctioning 18 commercial and retail properties in the city of Shenzhen, which it hopes will yield about $82 billion yuan, equal to about $12.8 billion, according to the South China Morning Post.

Also on 5 November, investors dumped bonds of multifaceted real estate firm Shanghai Shimao, shaving almost 20 percent off the bonds’ value and dropping the price equivalent to 64.5 U.S. cents. 

Many Chinese development firms also have off-balance-sheet debts, such as secret loans and private bond guarantees, which have multiplied their debt loads and that regulators and the public have begun to learn about only recently.

“It’s very hard to say who is safe now,” Philip Tse, chief of Hong Kong and China property research at Bocom International told Bloomberg.

Chinese junk-rated real estate bonds, the country’s most widely-held high-yield debt, are now worth $37 billion less than their face value, with interest rates rising past 20 percent, leaving companies unable to afford to refinance bonds coming due now, according to Bloomberg.

Also, property values are sagging, regulators have slapped limits on how much debt developers can carry, and share values have plunged. Some developers also are on the hook for dividends owed to investors.

“We’re on the brink of a systemic series of defaults in China real estate” that could drive away foreign investors, Dhiraj Bajaj, Lombard Odier’s head of Asian credit, said in a Bloomberg interview.

“We think the situation has become so acute that we need to see a national rescue, in the form of national champions or a state fund coming to buy dollar debt, to signal they are the lender of last resort,” he added.

TREND FORECAST: Beijing has taken extraordinary measures to deflate its booming decades-long real estate bubble before it explodes. Will they be successful in quelling it while not driving the nation into recession? It should be noted that real estate activity accounts for some 25 percent of China’s GDP (compared with just 15 percent in the U.S.), thus a sharp fall-off of prices will hit the economy hard. 

Thus, there will be a decline in economic growth in the years ahead, and the government has prepared for it by ramping up its dual-circulation policy which is designed to continue to export as much as they can but import less in its effort to build a “Made-in-China” self-sustaining economy. 

As we have continued to forecast, with Europe and America losing what was once stylish popular cultural appeal, China and much of Asia will look inward to build and support their identity by buying what they produce in both hard goods, entertainment and national spirit. 

3 Comments
  1. Brian Lee 8 months ago

    They might be able to weather the storm……they have a helluva lot of consumers

  2. Eagle11 8 months ago

    Agreed, but it must be deftly handled.

    I hope we can avoid Lehman 2.0

  3. […] Sep 2021), “China’s Real Estate Troubles Ripple Across Emerging Markets” (26 Oct 2021) and “China’s Real Estate Crisis Grows” (9 Nov […]

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