Mark Williams, chief Asian economist at Capital Economics, estimates that China still has about 30 million unsold properties that could house 80 million people. That is almost the entire population of Germany.
Here’s a look at some of these projects and how the problem first came about.
Real estate and related sectors are a large part of the Chinese economy, accounting for up to 30% of GDP. The share of economic output in the construction industry and related activities is “far higher than in other large economies,” said Williams.
This has given the country rapid economic growth for decades.
For years, however, critics have questioned whether this growth engine created a ticking time bomb for the world’s second largest economy. That’s in part because of the massive debt many developers have taken on to fund their projects.
As China’s most indebted developer, Evergrande has become the figurehead of unsustainable growth, with liabilities exceeding $ 300 billion.
In a recent report, Zhu wrote that 12 Chinese real estate firms defaulted on bond payments totaling about 19.2 billion yuan (nearly $ 3 billion) in the first half of the year.
“This represented nearly 20% of total corporate bond defaults in the first six months of the year, the highest in any sector,” she added.
The pandemic temporarily halted activity. But construction later came back to life when China reopened and the country’s real estate market saw a brief recovery.
Since then, however, the market has stuttered again. And there is no sign of immediate relief.
In the last few months “measures of price growth, housing construction” [construction] Starts and sales “declined significantly, Zhu noted. In August, real estate sales, based on the area sold, declined by 18% compared to the same period last year, she added.
In the same month, new home prices rose 3.5% “year over year, the lowest growth since the property market recovered from the effects of the June 2020 pandemic,” Zhu wrote.
“The demand for residential property in China is entering an era of continued decline,” Williams wrote in a research note. He called this “the root of Evergrande’s problems – and those of other heavily indebted developers.”
There is also the problem of unfinished projects, even when there is demand. The majority of new properties in China – around 90% – are being sold before completion, which means setbacks for home builders could directly impact buyers, according to economists.
“[This] gives authorities a strong incentive to ensure ongoing projects continue while failing developers are restructured, “said Williams.
The central bank may not have made specific reference to Evergrande, but recently the central bank has been pumping cash into the financial system to stabilize the situation and calm nerves.
To be clear, not all businesses are in dire straits. While some players are clearly struggling, “most developers are not on the verge of default,” says Julian Evans-Pritchard, a senior China economist at Capital Economics.
“With a few exceptions, most large developers are in a much stronger financial position than Evergrande and should be able to cope with temporary increases in their borrowing costs due to contagion,” he said in a statement to clients. This should, at least in the short term, calm things down “amid the current market fluctuations,” he added.
But in the long run it may matter little.
“Successfully managing the structural decline in housing demand over the next decade will prove more difficult,” wrote Evans-Pritchard. “A protracted consolidation in the industry over many years seems more likely than an impending wave of developer failures.”