Global Source Partners
Evergrande and stress in China’s property market
Andrew Collier | Sep 28, 2020
China’s property market has long been the weak link in the economy. It is the bubble that supports growth – including local consumption, fixed asset investment, and local government fiscal revenue. Although property sales remain healthy, the developers themselves are increasingly under financial strain. The case of Evergrande’s reportedly requesting a bailout from the Guangdong government is one major example.
As a result, corporate, loan and bond defaults are rising. Beijing has been tightening credit to the property sector to reduce the potential risks of a real estate crisis. However, the current difficult economic conditions, along with a shortage of capital, have raised the risks to the sector. A “Minsky Moment” is most likely avoidable due to the ability of the state to shift capital, but significant risks remain to economic growth.
Will China have a financial crisis due to a collapsing property market?
The reports in the Chinese press that China’s largest developer, Evergrande Group, has requested a bailout from the Guangdong Provincial Government have raised fears that China’s property market is on the verge of collapse. The unverified reports include a list of Evergrande’s debtors. According to that list, almost half of the company’s CNY835 billion in debt is from non-bank lenders, including private and state corporations, trusts and local government companies.
The company, which has over $120bn of debt, said in a filing to Hong Kong’s stock exchange last week that the documents were “fabricated and pure defamation” and that it had reported the matter to China’s security authorities, according to the Financial Times.
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Could the collapse of Evergrande cause a financial crisis? Yes. Property owners both with Evergrande and other developers would abandon the property asset class; banks and other financial lenders would withdraw loans, leading to bank defaults; and local governments would see their largest single source of capital evaporate.
Is this likely to occur? No. Beijing or one of its proxies would step in (they may now already be doing so) and recapitalize the company. In fact, as one of China’s wealthiest provinces, Guangdong would be a likely candidate to act as the overseer of Evergrande’s recapitalization, just as the policy banks have been put in charge of the dissolution of HNA. However, even a recapitalization would be extraordinarily messy and could dent confidence in property as an asset class.