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At The Spectator, George Magnus discusses the Chinese real estate market, and the difficulties faced by large property developers there, including Evergrande and Country Garden. Magnus explains the heavy reliance in China’s debt markets on real estate as collateral, and emphasizes that “The danger of contagion is never far away.” He writes:
Once, not that long ago, few people outside China had heard of the property developer Evergrande. Now it is synonymous with failure, debt and loss — and seen as the tipping point in China’s real estate market three years ago. Now meet Country Garden, another large property developer, hailed even a year ago as a model “corporate citizen.” As of this week, it is a penny stock facing a debt and liquidity crisis, cannot service its US dollar debt, and is on the brink of default. Its financial demise is not quite on the scale of Evergrande, but it comes at a worse moment, when China’s economy is in the eye of a bad economic news storm, consumer and business confidence are fragile, and when the word “contagion” has resurfaced.
Country Garden and Evergrande are the highest profile failures in China’s beleaguered real estate sector, in which companies like these, accounting for two fifths of Chinese home sales, have defaulted. Country Garden has liabilities of around $190 billion, compared to $300 billion for Evergrande, but also has over 3,000 projects across China, or four times as many as Evergrande. If Country Garden has to write off unsold or uncompleted homes, or if prices fall even more significantly, there will be greater contagion risk.
China’s official house price data isn’t wholly reliable because it is based on surveys rather than transactions. Recently published numbers though suggest that existing house prices are down by 15 percent compared with 2021. New home prices are said officially to have dropped by about 2.5 percent compared with 2021, but there is plenty of uncertainty about whether this reflects actual prices.
Because of the significance of real estate in the Chinese economy — it is thought that maybe as much as two fifths of the collateral behind loans in the entire financial sector is linked to property — the danger of contagion is never far away.
Read more here.
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