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    What is causing China’s real estate sector to collapse?

    • 5 min read
    • Last Modified Date: January 24, 2023
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    Big Chinese property developers, such as Evergrande, are suffering a huge cash shortage, weighing down the industry as well as housing demand and prices.

     

    The latest figures for July indicated symptoms of a downturn in China’s economy. Covid-19 instances have been increasing, and the government has enforced lockdowns in several economic hubs, including Shanghai and Wuhan, as part of its ‘zero Covid’ policy. This has resulted in a decrease in both demand and output.

    The country just avoided a recession in the second quarter, rising by only 0.4%.

    However, one of the most serious issues confronting China is the real estate crisis. Big property developers are suffering a major cash shortage, pulling down the sector as well as house prices and demand.

    Do not miss India – Another Asian Refuge For The Investors Running From China Real Estate Debt Crisis.

    What exactly is China’s real estate crisis?

    The real estate industry is one of the most important industries in the Chinese economy. According to an Economic Times study, it represents 29% of overall gross domestic product (GDP) and 30%-40% of total bank loans.

    Furthermore, property accounts for 70% of Chinese household wealth.

    China enacted the ‘three red lines’ strategy in 2020. Under the policy, if a corporation had a debt-to-asset ratio of 70% or greater, it was barred from obtaining more bank loans.

    In addition, corporations must keep their net debt-to-equity ratio at 100% and have adequate cash on hand to cover short-term borrowings and loans.

    The country’s largest real estate developer, Evergrande Group, stated in 2021 that it will default on its debt commitments. It has $300 billion in outstanding debts.

    The corporation employed over 200,000 people and built 2% of all structures in the country.

    As of September 2021, around 1.5 million individuals in China had reserved houses with Evergrande.

    Because of the regulatory change, the firm was unable to get more bank financing. As a result, it was unable to provide over a million house purchasers with the promised dwellings.

    Along with Evergrande, numerous other real estate businesses, including Fantasia Holdings, Sinic Holdings Group, and Sunac Developers, have revealed that the promised residences have not been delivered. Sunac is the third-largest real estate firm in China.

    Home purchasers in China declared a mortgage payment ‘boycott’ in July because they had not received their promised homes. The demand for new homes declined, and property prices plummeted.

    This has exacerbated the banks’ problems. In July, the reduction in new house sales in China reached 28.9 percent, while new property investment fell by 12.3 percent. According to AlJazeera, housing prices declined 0.9%, the most since September 2015.

    ING, a worldwide financial services organization, reduced China’s GDP growth prediction for FY23 from 4.4% to 4%.

    What happens to the Chinese economy now that the property crisis is worsening and Covid-19 instances are increasing remains to be seen.

     

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