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India - Another Asian Refuge For The Investors Running From China’s Real Estate Debt Crisis
What exactly is this China debt crisis?
If you have been reading the news lately, you would have seen or read something about Evergrande, debt and crisis, and China real estate. Well, China Evergrande, a Chinese real estate conglomerate with the dubious distinction of being the most indebted real estate developer in the world, is engulfed in a solvency crisis that has lasted more than a year. And the crisis is not limited to Evergrande.
A growing number of Chinese property developers are experiencing financial difficulties, while property sales and home prices in China are plummeting. And it is easy to see why investors flee the real estate market in China. And have sought refuge from the Chinese real estate debt crisis in the broader Asian credit market, citing India as one opportunity shielded from the chaos.
But, what exactly is this China debt crisis?
The Evergrande Group employs over 200,000 people and is the second-largest real estate company in total sales in China. Its primary business is to purchase large tracts of land, develop them into houses, restaurants, and other structures, and then sell them to interested buyers. However, the company takes on large amounts of debt from banks and investors and short-term loans from suppliers and property buyers to fund its operations.
It owes more than $300 billion in total liabilities and must pay $37 billion in interest and maturing debt over the next year. Given its precarious financial position, rating agencies such as Fitch and S&P have downgraded its bonds, which have traded well below 50 cents on the dollar.
In addition, the company has taken money in advance from over 1.5 million property buyers, promising to deliver developed properties to them in the future, but has yet to pay many suppliers. The wealth management team of the company has amassed over $6 billion in investments from its employees, promising high returns. It has defaulted on these products and has offered to give away parking spaces and other real estate in exchange for these loans, which has sparked public outrage.
Evergrande is far from being the only real estate issue for China. The collapse of the Evergrande group would be disastrous for everyone. Some suppliers are awaiting payment. Banks are hoping that their loans will get repaid. There are also homebuyers hoping their unfinished home will see the light of day. If Evergrande goes bankrupt, the ramifications will not be limited to the real estate sector — they will be far-reaching. It will also send shockwaves through the industry, as one in every five of the largest real estate developers in China has violated similar limits. Real estate prices could plummet as developers try to eliminate unsold homes.
More importantly, it may pose a problem for the Chinese people. Nearly 70 percent of Chinese household wealth gets invested in real estate, and a sudden drop in prices could result in unprecedented wealth erosion. So, by all accounts, this is a problem, not just for large developers but also for the general public.
So, where are the investors now?
Due to the rocky state of the real estate market in China, real estate investors are looking for more stable ground in India and other Asian markets. Chinese corporations besieged the real estate sector have been at risk of default due to the crisis of the Evergrande and its cascading effects.
However, despite the government’s policy changes, such as easing restrictions and introducing monetary stimulus, several analysts still expect defaults. As a result, investors leave the market and put their money into corporate bonds in other countries. According to data from the Bank of New York Mellon Corporation, capital inflows into corporate debts increased in South Korea, Indonesia, Singapore, India, Malaysia, and Japan over the last three months. At the same time, China has seen capital outflows. Goldman Sachs Group Inc. recently took a bullish stance on Asian high-yield bonds. Rising inflation has resulted in losses for broader Asian bonds, as well as losses in many other parts of the world’s credit markets, but they have been much milder.
Investors have sought refuge from the Chinese real estate debt crisis in pockets of the broader Asian credit market, citing India as one of the opportunities that have gotten relatively shielded from the chaos. They have sought refuge in Indian investment-grade and high-yield credit, as well as in other parts of Asia other than China, to reduce their exposure to Chinese real estate.
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China’s Real Estate Debt Crisis FAQ'S
In the last two years, Beijing has sought to reduce developers’ reliance on debt, putting pressure on China’s massive real estate industry. In recent months, global investors have primarily focused on China Evergrande’s ability to repay its debt and the potential spillover effect on the Chinese economy.
Chinese real estate companies are defaulting due to a lack of financing amid a broader industry crackdown on borrowing. As a result, over 11 real estate companies defaulted on their bonds this year.
Hui Ka Yan, a businessman, founded Evergrande, formerly known as the Hengda Group, in Guangzhou, southern China, in 1996. Evergrande Real Estate currently owns over 1,300 projects in over 280 cities throughout China. The Evergrande Group now includes far more than just real estate development.
Yes, real estate does have a future in India. The Indian real estate sector is expected to reach a market size of US$ 1 trillion by 2030, up from US$ 200 billion in 2021, and to contribute 13% of the country’s GDP by 2025. Hospitality, retail, and commercial real estate are also expanding rapidly, supplying much-needed infrastructure for the expanding needs.
The real estate market in India will grow to Rs. 65,000 crore by 2040, up from Rs. 12,000 crore in 2019. The Indian real estate sector is expected to reach a market size of US$ 1 trillion by 2030, up from US$ 200 billion in 2021, and to contribute 13% of the country’s GDP by 2025.