Mark Williams, chief economist for Asia at Capital Economics, estimates that China still has around 30 million unsold properties, which could be home to 80 million people. That’s almost the entire population of Germany.
Here’s a look at some of these projects and where the problem comes from.
Real estate and related sectors make up a significant portion of China’s economy, accounting for up to 30% of GDP. The proportion of economic output linked to construction and adjacent activities is “much higher than in other large economies,” according to Williams.
For decades, this has helped the country maintain rapid economic growth.
But for years critics have questioned whether this engine of growth is creating a time bomb for the world’s second-largest economy. This is in part because of the massive debt incurred by many developers to finance their projects.
As China’s most indebted developer, Evergrande has become the poster child of unsustainable growth, with more than $ 300 billion in liabilities.
In a recent report, Zhu wrote that 12 Chinese real estate companies defaulted on bonds totaling about 19.2 billion yuan (nearly $ 3 billion) in the first half of the year.
“This accounted for nearly 20% of total corporate bond defaults in the first six months of the year, the highest of any industry” in mainland China, she added.
The pandemic temporarily halted activity. But construction later came to life with the reopening of China, and the country’s real estate market saw a brief rebound.
Since then, however, the market has shaken again. And there is no sign of immediate relief.
In recent months, “measures of price growth, housing [construction] Housing starts and sales “fell significantly, Zhu noted. In August, property sales, measured by floor space sold, fell 18% from the same period a year earlier, a- she added.
That same month, new home prices edged up 3.5% “from a year earlier, the weakest growth since the housing market rebounded from the pandemic fallout in June 2020,” wrote Zhu.
“Demand for residential properties in China is entering an era of sustained decline,” Williams wrote in a research note. He called it “the root of Evergrande’s problems – and those of other highly leveraged developers.”
Then there is the problem of unfinished projects, even if there is demand. The majority of new properties in China – around 90% – are sold before they are completed, meaning any setback for home builders could have a direct impact on buyers, economists say.
“[This] gives authorities a strong incentive to ensure that ongoing projects continue while failed developers are restructured, ”said Williams.
While not specifically referring to Evergrande, the central bank recently pumped money into the financial system to help stabilize the situation and calm nerves.
To be clear, not all businesses are in dire straits. While some players are clearly in trouble, “most developers are not on the verge of default,” said Julian Evans-Pritchard, senior Chinese economist at Capital Economics.
“With a few exceptions, most large developers are in a much stronger financial position than Evergrande and should be able to weather a temporary increase in their borrowing costs amid contagion fears,” he said. he stated in a note to customers. This should reassure “in the midst of the current nervousness of the market”, at least in the short term, he added.
But in the long run, it may not matter.
“Successfully managing the structural decline in housing demand over the next decade will prove more difficult,” Evans-Pritchard wrote. “A prolonged consolidation of the industry over many years seems more likely than an impending wave of developer failures.”