China’s top real estate developers, Evergrande and Country Garden, have defaulted on their debts. But the issues in China’s property market have much deeper roots.
Desperate property developers in China have resorted to gifts like new cars, free parking spaces, phones and other consumer goods to attract homebuyers and boost flagging sales.
These incentives are just the tip of the iceberg in a crisis involving hundreds of billions of dollars in home builder debt, trillions in local government debt and at least a billion empty apartments.
But it wasn’t always the case. Since China’s economic liberalization in the 1970s and housing reforms in the late 1980s, locals have flocked to properties as the investment vehicle of choice over alternatives such as the stock market.
The property and construction boom helped fuel China’s – and the world’s – economic growth for 30 years. By some estimates, property in China was worth $60 trillion at its peak, making it the biggest asset class in the world.
As property values soared and Chinese households piled on more debt, Beijing attempted to cool its housing market and rein in risky business behavior. Spooked, Chinese consumers soured on property purchases.
But the country’s property crisis has deeper roots than speculation and uncontrollable debt. Watch the video to find out how China’s property bubble burst.
Pictured here on Sept. 7, 2023, are residential buildings under construction at the Tao Yuan Tian Jing project, developed by Evergrande in Yangzhou, China.
Bloomberg | Bloomberg | Getty Images
Shares of embattled Chinese property Evergrande hit an all-time low of 18.8 Hong Kong cents (2.4 U.S. cents) after a Hong Kong judge delayed the court hearing to address a winding-up petition.
Evergrande’s shares plunged over 20% from last Friday’s close of 23.6 Hong Kong cents to the all-time low early Monday, before recovering slightly to 22.2 Hong Kong cents.
Reuters reported that Justice Linda Chan from Hong Kong’s High Court pushed back the hearing from Oct. 30 to Dec. 4, which would be the last before a decision is made on the winding up order.
Evergrande must come up with a revised restructuring proposal before that date, or the company will likely to be wound up, she said.
Back in June 2022, Top Shine, an investor in Evergrande unit Fangchebao, filed a winding-up petition against the property firm, according to filings from Hong Kong’s High Court, but in light of Evergrande’s restructuring, the petition was put on hold.
As such, Evergrande considered it necessary to re-assess the terms of the proposed restructuring “to meet the company’s objective situation and the demand of the creditors,” it said.
With China’s property bust threatening to sink the country’s economic recovery, Xi Jinping is looking for someone to blame.
After putting the billionaire founder of Evergrande, a heavily indebted property firm, under investigation for possible crimes, Beijing is expanding its probes to include bankers and financial institutions that facilitated developers’ risky behavior, people familiar with the matter say.
All of Country Garden‘s offshore debt could potentially be in default if the Chinese property developer fails to make a $15 million coupon payment on Tuesday, which marks the end of a 30-day grace period.
The embattled real estate giant warned last week it may not be able to make all its offshore repayments, including those issued in U.S. dollar notes.
Once China’s largest real estate developer, Country Garden narrowly avoided default in early September after it managed to pay $22.5 million in bond coupon payments. Its creditors voted to extend repayments on six onshore bonds by three years.
Country Garden vs. Hang Seng Index
The founding family of Country Garden reportedly provided the company with an interest-free loan of $300 million, Reuters reported Friday, saying the family was trying to sell another jet to raise money.
If the Country Garden fails to make the repayment on Tuesday, it would become the latest casualty among many large Chinese real estate developers that have defaulted on their debt.
Chinese property giants including Evergrande and Country Garden have been hit by debt problems, hurting consumer confidence in the sector.
Shares of Country Garden rose 1.37% in early trade, tracking a 0.86% rise in the broader Hang Seng Index.
Shares of Evergrande were suspended on Thursday, Hong Kong’s exchange announced. Seen here are residential buildings under construction at the Tao Yuan Tian Jing project, developed by China Evergrande Group, in Yangzhou, China.
Bloomberg | Getty Images
Shares of China Evergrande Group were suspended on Thursday, Hong Kong’s exchange announced.
The chairman of the embattled Chinese real estate developer has reportedly been placed under surveillance, according to Bloomberg News.
Evergrande shares last closed at 32 Hong Kong cents on Wednesday.
This is not the first time that Evergrande’s shares have been suspended. Trading was suspended in March last year and only resumed trading on Aug. 28, after a 17 month hiatus.
Earlier this month, Evergrande delayed a debt restructuring meeting with creditors, saying in a filing “the sales of the Group has not been as expected by the company” since its March debt restructuring announcement.
As such, Evergrande “considers it necessary to re-assess the terms of the proposed restructuring to meet the company’s objective situation and the demand of the creditors.”
China’s urbanization drive may be drawing to a close — and that could further hurt the already ailing property sector, according to China economist Hao Hong.
“Fixing the property sector may be a multi-year or even a decade’s work in front of us. Reason being, we built way too many housing for Chinese people,” the chief economist of Grow Investment.
“Also the Chinese urbanization process, which has been progressing very fast in the past 10 years, is coming to a halt,” Hong added.
China’s property market has been embattled by faltering consumer confidence, as property giants Evergrande and Country Garden are mired in debt problems.
Not having an overbearing Chinese property sector actually is good for the Chinese economy going forward.
Evergrande, which defaulted in 2021 following a liquidity crisis, announced Friday it would delay a debt restructuring meeting which was due Monday. Country Garden is also teetering on default.
Hong noted that 18 trillion yuan ($2.46 trillion) worth of Chinese property were sold two years ago. He said managing 10 trillion this year, or five to six trillion yuan worth of sales further down the road, would be considered “lucky.”
China’s August new home prices dipped 0.3% month-on-month, extending the real estate slump. The figure also marked a 0.1% drop compared to a year ago.
Shanghai’s city skyline as seen from observation deck at Shanghai Tower in China.
Qilai Shen | Bloomberg | Getty Images
Just over the weekend, a former Chinese official warned that China’s population of 1.4 billion would not be able to fill the unoccupied apartments across the country.
“There is now an oversupply of real estate … 1.4 billion people may not be able to live in them,” said He Keng, a former deputy head of China’s statistics bureau. He was speaking at a conference, according to local media reports.
“Once people reset their expectation, and also the economy [restructures] to regrow from other industries rather than relying mostly on the property sector for growth, then we will actually have a better, much healthier Chinese economy than before,” said Hong.
“Not having an overbearing Chinese property sector actually is good for the Chinese economy going forward.”
UAW President Shawn Fain marches with UAW members through downtown Detroit after a rally in support of United Auto Workers members as they strike the Big Three auto makers on September 15, 2023 in Detroit, Michigan.
Bill Pugliano | Getty Images
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Nasty September Japan outperformed other major markets in Asia-Pacific on Monday. The benchmark Nikkei 225 index rebounded about 0.9% off the three-week low it closed at Friday after a bruising week of central bank meetings that also knocked 4.2% off the S&P 500. U.S. stocks retreated Friday in a fourth straight day of losses for the three major benchmark indexes. On Monday, the Hang Seng Index was down more than 1% weighed down by the Chinese property sector after Evergrande said over the weekend that it would delay a debt restructuring meeting due Monday.
Will they, won’t they? The clock is ticking, again. U.S. lawmakers over the weekend were not optimistic on a budget resolution that would keep the government funded for the remainder of the fiscal year. Current spending laws are due to expire on Sept. 30. That means if Congress does not reach an agreement before 12:01 a.m. on Oct. 1, the government will shut down. House Republicans on Thursday sent the chamber into recess, delaying further developments in the negotiations.
$100 an oil barrel next? Russia imposed an indefinite ban on the export of diesel and gasoline to most countries, a move that risks disrupting fuel supplies ahead of winter and threatens to exacerbate global shortages. The ban, which came into immediate effect and applies to all countries apart from four former Soviet states, does not have an end date. The countries exempt from the ban include Belarus, Kazakhstan, Armenia and Kyrgyzstan, all of which are members of the Moscow-led Eurasian Economic Union.
European triple dilemma European central banks are now balancing between slowing growth, still too high inflation and the delayed impact of unprecedented rate hikes. Throw in another spanner: rising oil prices. But September marked a change in tone, as some central banks put the brakes on interest rate hikes after nearly two years, while others appeared to be at the brink of peak rates. This has turned market attention to how long rates will be held at current levels, amid strains on economic growth.
[PRO] The oversold and the overbought on the S&P500 Investors on Wall Street are contending with the latest forward guidance from the Federal Reserve, which has helped underpin an overall losing week for major indexes. CNBC screened FactSet data to examine what equities traders are betting on, or fleeing, as macroeconomic uncertainty continues.
Labor strikes have returned with a vengeance in the U.S. in a summer of discontent.
Hollywood writers and producers reached a tentative deal that would end a strike that is nearing 150 days, though there still isn’t any for actors.
Talks between the Writers Guild of America and the Alliance of Motion Picture and Television Producers only resumed last week after months of starts and stops. A major sticking point was language over the use of artificial intelligence.
And it’s not just them.
About $5.2 billion in cargo was stuck off West Coast ports in June at the height of the “slow and go” pace of the International Longshore and Warehouse Union workforce as a result of unresolved issues in negotiations with port management.
Biden’s hastily arranged trip is happening only 24 hours before a former — and a prospective — election foe, former President Donald Trump is also scheduled to arrive in the state to show his own solidarity with the autoworkers.
Both are eager to court voters, especially since a new NBC poll found Biden and Trump were basically deadlocked in a hypothetical rematch more than a year before the general election.
Workers are getting desperate after decades of rising income inequality.
Some 362,000 workers have gone on strike so far in 2023, compared with 36,600 over the same period two years ago, according to data by Johnnie Kallas, a Ph.D. candidate at Cornell University’s School of Industrial and Labor Relations, and the project director of the ILR Labor Action Tracker.
This desperation may start impacting the U.S. economy if the series of labor-management conflicts persist.
Desperation and inequality may well be the unknown wild cards.
NANJING, CHINA – AUGUST 18, 2023 – Aerial photo shows a residential area of Evergrande in Nanjing, East China’s Jiangsu province, Aug 18, 2023. (Photo by Costfoto/NurPhoto via Getty Images)
Getty Images
Shares of Chinese property developer Evergrande as much as 82% on Wednesday, leading gains on the Hang Seng Index.
The stock has since pared its gains, but was still about 70% higher.
The real estate sector was the top gainer on the HSI, but the overall index was still in negative territory, dragged by health-care and industrial stocks.
Other stocks like Country Garden Holdings and Logan Group also surged, gaining as much as 26% and 28% respectively, while the Hang Seng Mainland Property Index was up about 4%.
The gains come after Country Garden reportedly managed to pay $22.5 million in bond coupon payments on Tuesday, narrowing avoiding default.
The bond payments were originally due in August, but Country Garden submitted the payments hours before a 30-day grace period expired.
China’s property sector has languished ever since Evergrande defaulted in 2021. Last week, the stock resumed trading and closed nearly 80% lower in its first session in 17 months. Evergrande shares had closed at 35 Hong Kong cents on Tuesday.
Other property stocks have also plunged in the past year amid contagion fears. Shares of Country Garden have fallen 53% so far this year while Logan dropped 18%.
On Wednesday, China’s state-owned Securities Times published a commentary calling for the lifting of “policies restricting property purchases in cities other than the hottest top tier cities” as soon as possible, according to a CNBC translation.
The commentary argued that “in the current situation where there are major changes in the demand-supply relationship in the property market, it is no longer appropriate to retain restrictive policies that were previously implemented to curb speculation.”
It concluded, therefore, there was an “urgent need” to increase policy support to boost sales, thereby releasing demand suppressed by these rigid housing policy.
Residential buildings stand at the Metro Town development, jointly developed by CK Asset Property Holdings Ltd., Nan Fung International Holding Ltd. and MTR Corp., in Hong Kong, China, on Thursday, Jan. 11, 2018.
Anthony Kwan | Bloomberg | Getty Images
Hong Kong-listed property stocks surged on Monday, leading gains on the Hang Seng Index and powering the benchmark to be the top gainer in Asia.
Over the weekend, Country Garden won approval from its creditors to extend payments for a 3.9 billion yuan ($540 million) onshore private bond, according to sources and a document seen by Reuters.
Bloomberg reported the company also wired a coupon payment on a 2.85 million Malaysian ringgit ($613,000) denominated bond.
Country Garden is still scheduled to pay $22 million in coupon payments on two U.S. dollar bonds it missed in early August. The grace period ends Wednesday.
Some of China’s largest banks also cut interest rates on yuan deposits, including the Industrial and Commercial Bank of China, China Construction Bank Corp and Agricultural Bank of China.
Property management firm and affiliate Country Garden Services Holdings will also be removed from the Hang Seng China Enterprises Index. It will be replaced by online travel agency Trip.com.
The Hang Seng China Enterprises Index serves as a benchmark that reflects the overall performance of mainland securities listed in Hong Kong.
Stocks closed mostly lower Friday, capping off a bruising week of losses as Treasury yields jumped and China’s mounting property woes gripped investors. The Dow Jones Industrial Average DJIA, +0.07%
rose about 27 points, or 0.1%, ending near 34,501, according to preliminary FactSet data. The S&P 500 index SPX, -0.01%
was nearly flat at 4,370 and the Nasdaq Composite Index COMP, -0.20%
shed 0.2%, despite briefly turning positive late in the session. It still was a tough week for equities, with the Dow booking a 2.2% loss, the S&P 500 index a 2.1% decline and the Nasdaq a 2.6%. The Nasdaq also posted its biggest 3-week decline since December 2022, according to Dow Jones Market Data. Yields on the 10-year Treasury rose for a 5th week in the row, with the benchmark TMUBMUSD10Y, 4.252%
rate briefly touching its highest level since November 2007, before settling back at 4.251% on Friday. China Evergrande’s EGRNF, Chapter 15 bankruptcy filing in New York late Thursday kept focus on the wobbling property market in the world’s second-largest economy. Earlier in the week, Country Garden Group missed a dollar-denominated debt payment. Next week investors will be focused on Federal Reserve Chairman Jerome Powell’s speech on Friday at the Jackson Hole economic summit for hints to whether the central bank is likely done hiking rates in this cycle. The Fed’s policy rate sits at its highest level in 22 years.
China’s real estate troubles are accelerating. Prospective home buyers are holding back on making purchases, leading to weak sales that compound the urgent need for policymakers to step up support for the industry.
New home sales for the top 100 developers dropped by about a third in June and July from a year ago, after double-digit growth earlier in the year, said Edward Chan, a director at S&P Global Ratings. With most apartments in China sold before they are completed, weak new home sales will likely lead to significant cash flow issues for developers.
“We think the situation is probably getting a little bit worse because of this Country Garden incident,” Chan told CNBC in a phone interview Thursday. He added he hasn’t seen any improvement in new home sales so far.
At a time when rafts of data are pointing to a rapidly slowing economy, this lack of improvement, along with Country Garden‘s looming default, is making it more difficult for property developers to raise funds.
Late Thursday in the U.S., the world’s most indebted property developer Evergrande filed for bankruptcy protection, further shaking up investor confidence.
The deepening crisis of confidence is adding to pressure on the world’s second-largest economy.
The debt troubles at Country Garden and the uncertainty of government support are feeding into broader unease in the Chinese housing market.
Louise Loo
Oxford Economics
The Chinese property sector has been reeling since 2020, when Beijing cracked down on the debt levels of mainland property developers.
Years of exuberant growth led to the construction of ghost towns where supply outstripped demand as developers looked to capitalize on the desire for home ownership and property investment.
These measures, known as China’s “three red lines” policy, point to three specific balance sheet conditions developers must meet if they want to take on more debt.
The rules require developers to limit their debt in relation to the company’s cash flow, assets and capital levels, with highly indebted developer Evergrande the first headline-grabbing default in late 2021.
A default by Country Garden could add $9.9 billion to the year-to-date global emerging markets high-yield corporate default tally, taking the total default volume for the Chinese property sector to $17 billion to-date in 2023, JPMorgan said in a note dated Aug. 15.
The U.S. investment bank expects China property to account for nearly 40% of all emerging market default volumes in 2023.
Much of Country Garden’s problems have to do with its outsized exposure to less developed parts of China known as lower-tier cities. About 61% of developments, according to the company’s 2022 annual report, are in these lower-tiered cities, where housing supply outstrips demand.
“Country Garden sales performance has been kind of disastrous,” S&P Global’s Chan said, noting that sales in June and July dropped by about 50% year-on-year.
Chan said that lower-tier cities started to see sales weakness in May, while higher-tier cities started to see sales worsen in subsequent months.
As a result of Country Garden’s troubles, Chan said it’s “becoming more and more challenging” for China’s overall real estate sales to reach S&P’s base case of 12 trillion yuan to 13 trillion yuan this year.
“Instead of an L-shape it could be a descending staircase,” he said.
Chan said S&P’s bear case for China’s property sector is for 11 trillion yuan in sales this year, and 10 trillion yuan for 2024.
That’s still only nearly half of what the country’s real estate market sales were at its peak 2021 — at 18 trillion yuan, according to figures Chan shared.
At their mid-year economic review meeting in July, China’s top leaders vowed to “adjust and optimize policies in a timely manner” for its beleaguered property sector.
To date, they have yet to clearly demonstrate their plan to adapt to “major changes” in the demand-supply dynamics in the property market.
“The debt troubles at Country Garden and the uncertainty of government support are feeding into broader unease in the Chinese housing market,” Louise Loo, lead economist at Oxford Economics, wrote in a note dated Aug. 11.
As China’s property sector consolidates amid the debt and credit malaise, state-owned developers are better positioned to grow than non-state ones.
State-owned developers saw contracted sales grow by 48% in the first seven months of this year from a year ago, while developers that were not state-owned saw sales fall by 19%, according to data from Natixis Corporate and Investment Banking.
This is enhancing state-owned developers’ ability to buy land from local governments since robust home sales are boosting their cash flow.
“Nowadays, 87% of the land purchases are by [state-owned enterprises], so how do you expect [privately owned enterprises] to grow further?” Gary Ng, a senior economist at Natixis, said in a phone interview Tuesday.
For this year through July, 87% of land purchases by value were by state-owned developers, similar to last year, Natixis data showed. That’s up sharply from 59% in 2021, the data showed.
Ng expects state-owned developers to have greater ownership in China’s real estate market going forward. But he said that while non-state-owned developers have had leverage problems in the past, having so many state-owned developers in the industry might make it more difficult to forecast actual demand.
Still, underlying housing demand in first-tier cities remains somewhat resilient and untapped, and may be unleashed once there’s greater policy clarity.
“Timely policy in stabilizing the demand and sales in the higher-tier cities would be very important,” said Chan from S&P Global.
“If that could be achieved then over time, the stabilization could be spilled over to the lower-tier cities. But that will take an even longer time.”
Heavily-indebted Evergrande, which has symbolized China’s property crisis, made its filing amid growing fears that the sector’s troubles will spread to other parts of the country’s economy.
Since mid-2021, companies accounting for 40% of Chinese home sales have defaulted, stoking fears about the resilience of the world’s second-largest economy.
A Chapter 15 bankruptcy is a way for foreign companies with U.S. assets to get access to domestic courts.
Spillover from Evergrande’s 2021 debt woes rattled investors in stocks and spurred a flight to safety in U.S. government bonds. Investors this week have been closely monitoring developments in China’s property markets.
Stocks were headed for another week of losses on Thursday, with the Dow Jones Industrial Average DJIA
off 2.3% so for the week, the S&P 500 index SPX
2.1% lower and the Nasdaq Composite Index off 2.4%, according to FactSet. Dow YM00, -0.08%
and S&P 500 ES00, -0.15%
futures fell slightly late Thursday.
Chris Low, FHN Financial’s chief economist, said the “mess in China” was resulting in a flight-to-quality bid for 10-year Treasurys, in a Wednesday note to clients. The 10-year yield BX:TMUBMUSD10Y
shot up to 4.307% on Thursday, the highest since November 2007, according to FactSet.
The Evergrande Group headquarters building in Shenzhen is pictured on January 11, 2022 in Shenzhen, Guangdong Province of China.
Liang Xiashun | Visual China Group | Getty Images
China Evergrande Group posted a combined loss of $81 billion in its long overdue earnings report late on Monday.
The world’s most indebted property developer fell into default in 2021 and announced an offshore debt restructuring program in March, having struggled to finish projects and repay suppliers and lenders.
Evergrande’s net losses for 2021 and 2022 were 476 billion yuan ($66.36 billion) and 105.9 billion yuan ($14.76 billion), respectively, as a result of writedowns of properties, return of lands, losses on financial assets and financing costs, the company said.
In its last normal year of operation, 2020, Evergrande posted a net profit of 8.1 billion yuan.
Evergrande’s colossal debt pile in recent years has become the source of serious concern about China’s property sector, a bedrock of the Chinese economy, with defaults and abandoned property projects seen across the country.
