Evergrande crisis experts: the end of the era of China’s real estate madness

Taiwanese financial celebrity Huang Shicong said that Evergrande represents China’s real estate problem, no matter the future of real estate is a soft landing, or a hard landing, the great era of crazy development of China’s real estate industry is over.

Chinese real estate giant Evergrande Group had another debt maturity failure on Tuesday (Oct. 12). The coupons of three US dollar bonds issued by Evergrande totaling 148 million US dollars expired on Monday (11), and there is still no news of Evergrande paying the interest so far.

The huge private company, which is deeply in debt crisis, has missed three consecutive debt repayment deadlines in the past three weeks, further fueling market worries about the spread of debt defaults in China’s real estate sector.

In addition, real estate companies such as Xinli Holdings, Fancy Year and Contemporary Land have also experienced problems in failing to repay their debts as scheduled.

“Evergrande actually projects the problem of China’s real estate, where long-term over-expansion has led to debts being accumulated in the hands of mortgage lenders or banks.” Huang Shicong said in an interview with Epoch Times. “This represents the decline of China’s real estate boom and bust, which will have a major impact on the Chinese economy next.”

He said that after two decades of real estate rampage, China’s real estate has started to top out and then fall back; enterprises and banks’ bad debts are collectively reflected in this Evergrande incident; based on the important position of real estate in the Communist Party’s economy’s domestic demand, once real estate prices decline, it will be a “very fatal blow to China’s future economic growth “.

“China (CCP) has been preventing real estate from going out of control, plus the U.S. sanctions (against the CCP) and the slowdown in mainland China’s economy itself have been putting pressure on real estate over the past few years; in turn, a sharp drop in real estate will put pressure on the economy. So, it’s a structural problem that’s hard to change.” Huang Shicong said.

According to U.S. investment bank Goldman Sachs, China’s residential real estate market output (including construction activities and services) was equivalent to 23 percent of China’s GDP in 2018.

The real estate sector is also a major source of employment in China. According to the National Bureau of Statistics of the Communist Party of China, about 18% of China’s 285 million migrant workers will be working in construction in 2020, and many university graduates will be working as real estate agents. Meanwhile, about one-third of local revenues come from land-buying activities by real estate developers.

Home prices plummeted in September, and buyers worry that the term homes are becoming rotten

Buyers are already anticipating a drop in home prices and are leaving the market in droves. According to a survey released by the Communist Party’s central bank, the percentage of Chinese urban savers expecting home prices to rise fell to 19.9 percent in the third quarter. This is down from 25.1% in 2020 and the lowest level since the first quarter of 2016.

Most past investors (speculators) are no longer making real estate investments in anticipation of losses; for those in rigid demand for housing, falling home prices represent more risk-taking, and with many of Chinese developers’ properties being sold on a term basis, homebuyers are fearful that the term home they buy may turn out to be a bad deal.

In recent days, several major Chinese real estate developers have reported declines in September sales, with many even reporting year-over-year sales declines of more than 20 or 30 percent. September has typically been one of the hottest months for sales in the past.

The Wall Street Journal reported Wednesday that a sharp and sustained decline in sales would have serious economic consequences, and that the impact of slowing sales in the real estate sector could spread to investment and construction, potentially hurting growth, jobs and local government finances.

Cheng Wee Tan, a senior equity analyst at Morningstar, said the slowdown in sales is partly due to tighter government policies on mortgages and weakened confidence among homebuyers. He said clients are worried that developers’ projects won’t be completed, and media reports about China Evergrande’s unfinished construction projects have fueled those concerns.

Three red lines have long crushed real estate developers

In August 2020, the Chinese Communist Party drew “three red lines” for real estate companies to limit their bank loans. The three rules are: first, the asset-to-liability ratio (i.e., debt divided by assets), except for pre-receipts, must not be higher than 70%; second, the net debt ratio of real estate enterprises must not be greater than 100%; third, the cash-to-short-term debt ratio (i.e., cash divided by short-term debt) of real estate enterprises must not be less than one times.

Huang Shicong said that Beijing’s previous “three red lines” policy wants to go to the bubble of the real estate industry, to Chinese real estate developers, especially some large real estate companies brought significant pressure to fall back, directly suppress the expansion of real estate policy in the past.

“They (real estate developers) used to rely on rapid expansion – buying land quickly, qualifying for land sites quickly, building them quickly and then selling them to consumers quickly, so they had to have a lot of reserve land and working capital on hand. When the expansion slowed down, it affected the financial structure of real estate companies.” He said.

Feng Chongyi, an associate professor at Australia’s University of Technology in Sydney and an expert on China, also told the Epoch Times, “The three red lines are that (the Communist Party) is out of money and is worried about a systemic collapse of the entire financial system and wants to prioritize protecting the state bank. Even if it is willing to protect (real estate), it does not have the ability to do so”.

No matter hard or soft road China’s real estate industry crazy era is over

Huang Shicong said the good situation is that China’s real estate slowly squeeze out the bubble, slowly landing, that the impact of time will be very long, the economic damage to mainland China is relatively small, but will drag down the medium and long-term development of mainland China’s economy; if it is a rapid squeeze bubble, it is tragic for China, but can be short term to get a chance to adjust, and then quickly move up.

“Either version, because the real estate driven economic boom situation, mainland China’s economy to run wild as in the past has also completely ended.” He said.

He predicted that in the short term, at least in two or three years, China’s real estate is bound to have to face a correction, need to study the specific policy challenges in China to be able to know the subsequent development.

He said the slower expansion of builders and the impact of a recession or economic slowdown in China on home buyers will put double pressure on the entire real estate industry, and real estate may remain bearish for a longer period of time in the future.

Whether Evergrande may become the second Lehman

When asked whether Evergrande spreads the risk overseas as the U.S. Lehman Brothers, Huang Shicong said that Evergrande itself does not have much impact on the global economy.

“In terms of China, Evergrande’s own factors have little impact on the global economy, but the bigger impact on the world is in the overall bubbling of the real estate industry in China. If the whole of China’s real estate slides down, according to the previous Pan Shiyi (Beijing real estate leading “SOHO China” chairman), the total market value of China’s real estate about 60 trillion U.S. dollars, if calculated according to the past world real estate correction rate of 20%, the impact on the Chinese economy will be quite large. ” He said.

“If China’s economy is affected by this, it will lead to a slowdown in overall demand, which will have an impact on raw materials, global consumer markets. So I think the recession in China caused by the real estate downturn will affect the world, which will have a conduction.”

Huang Shicong expects that China’s economic growth may also be dragged down by real estate in the future and continue to decline.

Fitch Ratings in September lowered its growth forecast for China over the next two years, citing a slowdown in real estate activity as “weighing on domestic demand. Fitch lowered its forecast for China’s gross domestic product (GDP) growth to 8.1 percent in 2021 from 8.4 percent and to 5.2 percent in 2022 from 5.5 percent.