China Property Market Risk
In recent years, the property market in China has experienced significant growth and has become a vital part of the country’s economy. However, there are increasing concerns about the risks associated with the market, especially in light of the current economic backdrop. We went through the Evergrande crisis, but now a new crisis is unfolding with Country Garden Holdings. A bigger developer than Evergrande could pose more problems for a solution given that the current ability of the Chinese government to respond is less than during the Evergrande crisis.
What is the current state of the property market in China?
The property market in China has been impacted by the ongoing COVID-19 pandemic, which has led to fluctuations in property prices. While some areas have witnessed a slump in prices, others have seen a stall in the real estate sector. The government’s policy measures, including restrictions on borrowing and mortgage payment conditions, have also played a role in shaping the market.
Impact of the pandemic on property prices
The pandemic has brought about uncertainties in the property market, with potential homebuyers becoming more cautious in their purchasing decisions. This has resulted in a slowdown in demand and has put downward pressure on property prices in certain regions.
Government regulations and their effect on the property sector
The Chinese government has implemented several regulatory measures to control the property market and prevent speculative activities. These measures, often referred to as “red lines,” include restrictions on purchasing multiple properties and tightening lending policies. While these regulations aim to stabilize the market, they have also had an impact on property developers and buyers alike.
Role of property developers in shaping the market
Property developers play a crucial role in the Chinese property market. They are responsible for the construction and development of housing projects, and their actions can significantly influence property prices and market trends. The financial health and business practices of developers are closely monitored by both the government and potential buyers.
The current state of the Country Garden crisis?
A recent article in the WSJ by Feng and Li note that Country Garden Holdings, a 31-year-old real estate company once hailed by Chinese officials as an example to others, failed to meet interest payments on two U.S. dollar bonds. This event signifies a fresh level of turmoil for China’s property market, with Country Garden Holdings noting a 1.77% decrease in 2007.
The property developer failed to pay $22.5 million interest on a $1 billion debt securities, resulting in the price of its bonds plunging to less than 8 cents on the dollar — a strong indication by investors that the company is expected to default. Country Garden’s stocks on the Hong Kong Exchange have significantly reduced in value, marking a decline of more than half since the start of the year. The developer is dealing with a cash flow issue, reflective of the abrupt decline in China’s housing market following a brief surge earlier in the year.
With several Chinese property developing firms having defaulted on their financial commitments in the last two years, causing nationwide distress and a substantial market slump, the impact of Country Garden’s unpaid debts is expected to ripple negatively through the sector. Investors are also reportedly worried about further possible defaults.
Only a year ago, Country Garden was seen as one of the foremost beneficiaries of the certain measures proffered by Chinese authorities in support of the real estate industry. Despite its financial difficulties, the developer remained confident in property market recovery and continued to acquire new lands as of April. However, sales have dramatically dropped in recent months and the company had to issue a warning of a possible net loss for the first half.
Its financial health has sparked unfounded rumors and speculations, forcing the company to issue repeated clarifications. A spokesperson stated that the firm was unable to meet its interest payments due to poor sales performance and inadequate liquid assets. It is possible to defer future bond payments in order to avoid defaulting. The Chinese Government has hinted at further interventions to bolster the beleaguered property market.
Implications for World Markets
Chinese property developers are in facing severe issues with several being delisted or under threat of being delisted. For example, Sichuan Languang and Zhongtian Financial were delisted in June according to Caixin. Another five developers were listed as almost certain to be delisted while three developers were under threat of delisting.
The question is if things get out of hand in China, how will this impact global markets and in particular real estate markts? Combined with the commercial real estate issues worldwide and potential problems in some markets with overbuilding, the potential for systematic risk is there.
