The potential collapse of Chinese real estate titan Evergrande grabbed the headlines – but it revealed a much deeper problem Beijing faces.
With the world’s most indebted real estate company on the brink of collapse, attention so far has focused on how its failure could send shockwaves through global markets.
Much has been said about Chinese real estate giant Evergrande – which has managed to rack up staggering $ 408 billion in debt – in the face of its “Lehman moment”, with experts fearing it could trigger a global financial crisis.
But as those nerves have calmed down in recent days, it is now clear that the Evergrande saga has exposed a major problem facing China today.
Real estate glut
Rhodium Group Director Logan Wright recently told the Financial Time that China now had enough empty properties to house more than 90 million people.
“So if you assume that they are trying to take this problem seriously, that suggests that we should be preparing for a lower growth rate in the future, especially in real estate construction,” he then said. declared to the ABC. China tonight.
“In many ways, Evergrande is sort of a symptom of a larger problem in the real estate industry in terms of the imbalance between supply and fundamental demand.”
This imbalance was suddenly highlighted several weeks ago, when 14 unfinished apartment buildings were demolished in Kunming, in Yunnan province (southern China).
Work on the Sunshine II project had started in 2011 but was never completed, the buildings having been vacant since 2013 before disappearing.
While this is not Evergrande’s project, it is a powerful reminder of the scale of the problem in China’s real estate sector – and the impact a reduction would have on Australia, given China’s previous reliance on our regard for iron ore supply.
Falling iron ore prices following the Evergrande woes mean “huge budget news” for the federal and WA governments, according to Chris Richardson of Deloitte.
“Both budgeted conservatively, but they may not have turned out to be conservative enough,” said Richardson. the australian this week.
‘The beginning of the end’
Evergrande’s dramatic fall began as the Chinese real estate market skyrocketed, with demand for housing in cities like Beijing and Shanghai spiking prices.
The company took out a series of loans and grew rapidly, capturing assets and making the most of China’s booming economy.
But when house prices started to fall in small towns and when the Chinese government implemented measures to reduce excessive mortgage borrowing through its “three red lines” policy, it left Evergrande in trouble. , with mountains of debt.
“Evergrande’s struggles have exposed the flaws in China’s financial system – unrestricted borrowing, expansion and corruption,” one New York Times nightmare readings analysis.
“The corporate crisis is testing the resolve of China’s leadership reform efforts as they chart a new course for the country’s economy.
“If they save Evergrande, they risk sending the message that some companies are still too big to fail. If they don’t, up to 1.6 million buyers are waiting for unfinished apartments and hundreds of small businesses, creditors and banks stand to lose their money.
Leland Miller, CEO of consultancy firm China Beige Book, said the Evergrande situation proves that China’s previous growth model will not survive.
“This is the beginning of the end of China’s growth model as we know it,” he said.
“The term ‘paradigm shift’ is always overused, so people tend to ignore it. But that’s a good way to describe what’s going on right now.
Meanwhile, according to Reuters, insiders say Beijing is now asking state-owned companies and state-backed real estate developers to buy Evergrande’s assets, another sign of a potential collapse looming.
Threat to Australia?
Junvum Kim, salesperson at Saxo Markets, said Evergrande now looks unlikely to impact the Australian real estate market as initially feared.
“The impact of systematic contagion on the Australian property market is expected to be unlikely, as Evergrande’s liquidity crisis has built up since last year with its high leverage – a debt ratio above 500 % – exposed to large US dollar bond issues, ”he said. .
“In addition, in the major Chinese cities of Shanghai and Shenzhen, the house price / income ratio is 3 to 4 times higher than in Sydney or Melbourne.
He also said the collapse of Evergrande was unlikely to trigger a global financial crisis, as the Japanese Fed’s Kuroda and Powell previously mentioned there was a low likelihood of a global debt crisis.
However, he said businesses and governments must act to avoid another similar fiasco in the future, arguing that “stricter regulations and constraints on the aggressiveness of corporate leverage criteria to better maintain governance overall and liquidity risk management “were necessary.
Mr Kim added that the potential collapse of Evergrande was probably not the only reason for the recent drop in cryptocurrency prices, but that “indirect cryptocurrencies will almost always be vulnerable to any systematic risk given of their high relative volatility compared to other asset classes “.
Originally posted as China’s Evergrande fiasco reveals alarming problem facing Beijing’s growth model