Evergrande crisis: 20 years after China’s real estate development, “the great era is over”-BBC News

“In the late 1990s, there was a Hong Kong drama “Genesis” about the development of real estate. I watched this drama when I was in college, and I joined the real estate industry after graduation.” A real estate official in Wuhan told BBC Chinese, ” I feel that from 1998 to 2018, these 20 years are the “Genesis” of the real estate industry in Mainland China.”

In 1998, under the pressure of the Asian financial turmoil, China insisted on not devaluing the renminbi, resulting in a sluggish foreign trade. The Chinese economy, which has been growing at double digits for many years, suddenly dropped to 8.8%. China desperately needed a new engine to boost the economy.

Zhu Rongji, who had just taken over as prime minister at the time, put real estate reform on the agenda.

In Zhu Rongji’s view, the best way to stimulate domestic demand is to activate the real estate market. The real estate industry chain is very long and involves many industries. Building materials, chemicals, steel, etc. will all benefit. Four months after the “registration”, the State Council under the leadership of Zhu Rongji officially announced that the era of welfare housing allocation has ended and the era of residential commercialization has begun.

After more than ten years, the real estate market became the locomotive driving China’s domestic demand, but it was also accompanied by stubborn diseases such as “explosive housing prices” and “land finance”, and even serious secondary problems such as “compulsory demolition”. Hurricane development has become an important driving force for China’s economy.

In this process, many Chinese real estate companies have followed the Hong Kong model of selling “off-plans” (pre-sale system)-borrowing hundreds of millions of funds from banks to buy land, and then opening sales within a few months and recovering the amount. Double the funds, and then invest the money to buy more land, borrow more debts, and open more orders.

Local governments are also selling large amounts of land in this process to enrich their finances. Residents buy houses and “get on the car” to realize asset appreciation under rising housing prices, which seems to have achieved a rare win-win situation.

Ten years have passed, and the good days of the real estate market are not over. Just like the Asian financial crisis in 1998, another crisis paved the way for a bright moment in China’s real estate industry. In 2008, the subprime mortgage crisis broke out in the United States and the financial tsunami spread to the world. In November of that year, China’s import and export data suddenly jumped off the cliff. The growth rate of exports fell from 19.2% last month to -2.2%, and the growth rate of imports fell from 15.7% last month to -17.9%.

In order to stimulate the real estate and boost the economy, the Ministry of Finance announced in 2008 that the deed tax rate for the first purchase of a house by an individual was reduced to 1%, and the stamp duty and land value added tax were temporarily exempted for individual purchases of commercial housing. The People’s Bank of China announced that the lower limit of loan interest rates for first-time home buyers and general improvement homes will be 0.7 times the benchmark interest rate, and the minimum down payment ratio will be adjusted to 20%.

These two powerful drugs have made the real estate’s pulling effect very dazzling. Just after the first quarter of 2009, the area of ​​residential transactions in 24 of the 30 key cities increased month-on-month, and the month-on-month increase in 10 cities even exceeded 50%.

By 2016, China will start a round of monetization of shed reform. In short, it will demolish the “old, broken and small” areas in the city that are difficult to support, and give cash subsidies to relocated households to encourage them to use the money to buy houses.

The addition of monetization of the shed reform is like preparing firewood, lighting the flame, and then pouring a pot of oil-the fire of China’s real estate market “rises”.

China’s real estate market has “increased both in volume and price.” Evergrande’s aggressive, high-leverage operation and the “east wind” of the policy swelled instantly, becoming China’s largest real estate company that year, and also pushing Xu Jiayin to the throne of China’s richest man.

Yang Yang, assistant professor of real estate at the Business School of the Chinese University of Hong Kong, told the BBC Chinese that the housing reform in 1998 released the predominant power of China’s real estate marketization, creating large-scale urbanization, rapid economic growth, and substantial improvement in people’s livelihoods. Therefore, real estate has stimulated the country’s Economic growth has made a great contribution.

However, the feast will not go on forever.

Yang Yang said that there will be various problems in the rapid growth of any industry, and the rapid development of real estate also lays four unsolved problems:

Not only that, the rapid development has caused China’s asset prices to continue to rise. Both companies and residents are borrowing heavily, and risks continue to accumulate.

Although from 2014 to 2017, the Chinese government used real estate to destock, so that the debt of the entire real estate industry chain was transformed into the housing loans of urban residents, and the debt pressure of real estate developers and banks was relieved. Although the debt pressure has been passed on, it has not been eliminated. The entire financial and real estate system is accumulating risks.

Once the income generated by the assets is not enough to pay the interest, the result can only be a “Ponzi scheme” financing of borrowing the new and repaying the old.

At this time, the financial system has become a pressure cooker with internal tumbling. The lid may be lifted at any time, a crisis will break out in an all-round way, and then it will enter a long period of financial deleveraging. This is exactly what happened in Japan 30 years ago.

In the 1980s, there was also a trade war between the United States and Japan. In the end, Japan voluntarily restricted exports and signed the Plaza Accord to intervene in the foreign exchange market to induce the devaluation of the U.S. dollar against the yen to solve the huge U.S. trade deficit.

After the Plaza Accord, in order to cope with the export pressure brought by the appreciation of the yen, Japan adopted loose monetary policy and proactive fiscal policy, which eventually caused a crazy real estate bubble.

Prosperous real estate has reduced household savings and shouldered huge debts. Once the bubble bursts, people’s spending power will be greatly reduced and the economy will stagnate, which is the “lost 20 years” that occurred in Japan.

American economist Hyman Minsky has a subtle analysis of this, so the moment the collapse occurs is called the “Minsky moment.”

In 2017, the “Warning Minsky Moment” first appeared in the speech of Zhou Xiaochuan, then governor of the People’s Bank of China, and seemed to herald the end of the real estate banquet.

In March of this year, Guo Shuqing, Chairman of the China Banking and Insurance Regulatory Commission, said even more bluntly-“In the last century, more than 100 financial crises in the world have been related to real estate. Before the subprime mortgage crisis in 2008, the US real estate mortgage loans exceeded 32% of GDP that year. At present, my country’s real estate-related loans account for 39% of banking loans, and a large amount of bonds, equity, trusts and other funds enter the real estate industry. It can be said that real estate is the biggest’grey rhinoceros’ in terms of financial risks in my country at this stage. ‘.”

Looking back at Evergrande in 2017, it is a time of boundless beauty. Chinese media Caixin quoted an Evergrande executive as saying that Xu Jiayin recalled at an internal meeting that 2017 was Evergrande’s most glorious year, with “full pocketbooks”. That year Evergrande chose to expand vigorously, pursue scale and speed, and pursue diversification. The company increased its leverage, and since then, the annual interest paid has exceeded 100 billion yuan.

“The boss (Xu Jiayin) has admitted the strategic mistakes made in 2017.” The executive said, “In the past few years, the country has started a new round of property market regulation. In 2019, China Evergrande failed to return to A and suffered short selling in 2020. Many factors have led Evergrande to where it is today. The boss (Xu Jiayin) recalled these situations, and it was rather sad.”

He is not alone on this path taken by Evergrande. A large number of Chinese real estate companies adopt a similar risk model of high debt and high turnover. The difference is that Evergrande has higher debt, faster turnover, more land and greater risks.

The above-mentioned real estate professionals in Wuhan believe that leverage itself is not evil. Grasping the trend and using leverage will not only help companies quickly succeed, but also benefit the entire economy. The evil is that too much leverage has been added and many people have been tied to the ship. Regardless of changes in trends, when the ship capsizes, it hurts others.

In fact, the policy signals to suppress the real estate industry and prevent the “Minsky moment” in China have been flickering for many years.

Yang Yang, assistant professor of real estate at the Business School of the Chinese University of Hong Kong, introduced that since 2010, the government has begun to regulate the real estate market to stabilize housing prices, land prices, and market expectations. In order to avoid financial systemic risks, we have adhered to the positioning of “no real estate speculation” since 2016, and adopted measures such as purchase restrictions, loan restrictions, strict price management, and market order. Since last year (2020), the government has successively introduced a series of policies that have a profound impact on the real estate industry, such as housing transaction guidance prices to combat speculative mentality and stabilize housing prices.

In addition, in August 2020, China proposed the “three red lines” for financing key real estate enterprises, and at the end of 2020, it proposed an upper limit on the concentration of real estate loans of financial institutions, two of which profoundly changed the real estate financial landscape.

The above-mentioned real estate professionals said that in the past, they felt that the supervision of real estate was “close a door and open a window”, and if the economy is not good, “doors and windows will be opened all at once”. After 2018, the industry feels more and more. Strong means “close doors and windows tightly”, and credit funds are getting tighter and “stealth”.

Under strict policy pressure, the growth rate of real estate loans in 2020 will be lower than that of various loans for the first time in eight years.

Real estate companies in it began to feel the suffocation of “doors and windows closed tightly”-since July 2020, Tahoe Group, Tianfang Group, Sansheng Hongye, Fusheng Group, China Fortune Land Development, Zhengyuan Real Estate, Xiexinyuan A number of real estate companies such as Innovation, Blu-ray Development, and Sunshine 100 have experienced bond defaults one after another.

“Driven by a series of policy adjustments, for real estate companies, the era of rapid expansion of capital dividends with high leverage and high turnover is over.” Yang Yang believes that the real estate industry will no longer be the backbone of China’s economy in the future. It will transform into advanced manufacturing and strategic emerging industries.

The above-mentioned real estate person introduced to the BBC Chinese that his company has experienced a wave of painful deleveraging two years ago, but the current difficulties are not too great. “The’big era’ of the real estate industry is over. As for what era is the future Many people don’t have time to think about it, so they will survive first.”

The Chinese real estate market has always been very fragmented, with an estimated 50,000 developers at its peak. Analysts said that in view of the small scale and poor quality of many developers, the Beijing authorities also hope to promote industry consolidation.

The third-ranked developer Vanke and Guangzhou-based KWG Group stated at their financial report meeting last month that they are both seeking mergers and acquisitions and intend to acquire land from their troubled counterparts. At this time, the price of land is often lower than publicly disclosed. Be cheap at auction.

Vanke said that in the past few months, it has been negotiating with Evergrande on project cooperation and has acquired three projects of Sichuan Blu-ray Development. Blu-ray Development, a small-scale developer, defaulted in July.

Country Garden Services, the property management arm of the developer Country Garden, said on Monday that it has agreed to acquire Fuli Global, a subsidiary of Guangzhou R&F Properties, for RMB 10 billion.

“In the current tightening credit environment, integration will definitely accelerate,” Reuters quoted an executive from a developer in East China as saying that the company is currently investigating several projects.

“If a company facing a liquidity crunch does not sell assets as soon as the problem occurs, it may face bankruptcy like Evergrande,” he said.

In addition to the industry integration of “survival of the fittest and eat the small”, Yang Yang believes that in the future, real estate companies can seek transformation opportunities in the following two aspects to adapt to the new environment: