China’s second largest real estate development company struggles to repay domestic loans
[Epoch Times October 02, 2021](English Epoch Times columnist James Gorrie/Annie Compilation) Is China’s real estate economy on the verge of collapse?
If not all, at least a large part is.
Evergrande is China’s second-largest real estate developer and the world‘s most indebted real estate developer, facing the danger of defaulting on debt. Most of Evergrande’s creditors are Chinese banks, and people can’t help but worry: Will this trigger the collapse of China’s huge and debt-laden financial institutions?
Not to mention, foreign investors also hold Evergrande’s debt of more than US$800 million. Considering the extensive economic ties between China and the rest of the world, people are worried about the economic impact on China and its foreign bondholders once Evergrande goes bankrupt.
Lehman China version?
These worries are all testable. The 2008 financial crisis was triggered by the collapse of the famous Lehman Investment Company on Wall Street, which was known as “too big to fail” at the time. However, when it really collapsed, other companies also began to close down. As a result, the government had to invest trillions of dollars to rescue it in the event of a severe economic recession. Some financial experts believe that the consequences of Evergrande’s default may be much more serious than that of Lehman.
China’s real estate bubble has been around for decades, and Evergrande is a typical representative of China’s long-term overheating of the real estate economy. A year ago, it made headlines because of the $120 billion debt service crisis.
However, I don’t know how the People’s Bank of China did some operations and solved the problem. Evergrande has maintained it to this day. But this time is different. In fact, it is not only Evergrande that is in financial trouble. Other high-debt real estate developers, such as Xinli Holdings, are also troubled. On September 20, Sony Holdings plummeted 87% in Hong Kong.
Distorted market will eventually expose its drawbacks
China’s over-reliance on the real estate industry to promote economic and employment growth is the source of the problems of Evergrande and other highly indebted real estate companies. Because the Chinese Communist Party (CCP) has always used economic growth and high employment to demonstrate the legitimacy of its regime. The CCP is most afraid of domestic instability, and real estate development is easy to take effect and control it.
In the past three decades, the CCP has achieved the above three goals through real estate development. The financial process can be reduced to a simple model: state-owned banks provide loans to state-owned enterprises and/or local party and government officials, who build apartments, shopping malls and other urban buildings and sell them to private investment groups in China. Then resell it to individuals and other private investment entities. In many cases, builders sell directly to the public.
Regardless of market demand, the CCP has always relied on real estate development to maintain high employment, which must maintain high demand and high housing prices. Compared with the United States or Europe, Chinese personal investment options are still limited. This is one reason why China’s household long-term savings rate (over 40%) is much higher than that of the United States (about 8%). It is also the reason why the ratio of house prices to annual household income in China is much higher than that in the United States. The ratio in China is more than 30%.
In order to protect the banks that provide loans for the purchase of land and building houses, one of the usual practices of the People’s Bank of China is to refinance existing loans and outstanding interest into new and larger loans. Another is the issuance of bonds, so the domestic bond bubble has blown to US$52 trillion. The CCP controls the People’s Bank of China and the value of the renminbi. Therefore, this distorted market and huge debt can continue and deteriorate year after year and decades.
Symptoms not disease
Just like all structures, whether it’s buildings or finances, distortions become fragile points, and they collapse when they are distorted to the limit. This is what Evergrande is experiencing. And as we said, Evergrande is just a typical representative. This is the case for most of China’s real estate development market, and one of the consequences is a “ghost city” built in the name of “investment.”
The problem with the “ghost town” is that thousands of apartment buildings are empty, no one is shopping in the mall, there are no passengers in the subway, and the office buildings are empty and no one rents them. Therefore, the rent cannot be collected, the mortgage cannot be repaid, and there is no return. Therefore, the only achievement of building a “ghost city” is to demonstrate the legitimacy of the CCP’s rule.
Of course, financial institutions and development companies are two grasshoppers on the same line, and the situation is not much better. They have accumulated and accumulated bad debts. After decades, they have accumulated tens of trillions of dollars. Just like what happened during the global financial crisis in 2008-2009, the failure of a company or a bank may lead to a series of failures.
Is the People’s Bank of China going to pull everyone back together?
One of the ways the People’s Bank of China can reduce or even avoid defaults is to lower bank reserve requirements, release some funds from the financial system, and let them flow to Evergrande to help it repay its debts. However, the central bank has done this several times before, and the effect of this time remains to be seen. It is particularly worth noting that when I write this article, China has paid domestic bondholders but has not repaid foreign creditors.
The CCP’s calculation may be to “stick to foreigners”, maintain domestic stability, and strengthen its own reputation. This may impact the U.S. and European stock markets, and may also inhibit the booming U.S. real estate market, because Chinese buyers are West Coast real estate and other markets. An important promoter of. What’s worse is that the bursting of China’s real estate bubble has triggered panic in the world market and caused global asset prices to fall.
This kind of domino effect is certainly possible, and we will wait and see.
About the Author:
James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog TheBananaRepublican.com. He settled in Southern California.
Original: Will China’s Real Estate Crash Trash the Global Economy? published in the English “Epoch Times“
This article only represents the views of the author and does not necessarily reflect the position of The Epoch Times.
Editor in charge: Gao Jing#
.