Trouble is brewing in China’s property market, which is emerging from a major debt-fueled construction boom. A liquidity crisis that was highlighted last year by the default of China Evergrande (OTCPK:EGRNF) has only worsened worse, with the largest real estate developer in the country fail to deliver a “preliminary restructuring plan” that it had promised by the end of July. The erosion of confidence in the property sector also saw sales of the country’s top 100 developers plunge last month by almost 40% year-on-year, according to data from Chinese property provider CRIC.
Instantaneous: Millions of people across China are struggling to finish their homes on time, and a growing boycott of mortgage payments in more than 90 cities threatens to worsen the situation. The debt crisis was already unsustainable before the current crisis, with the average mortgage payment accounting for more than half of a buyer’s monthly income. Seeking to revive the sector, China is working on a nearly $150 bailout fund to complete stalled property projects and avoid a backlash from angry homebuyers.
Interestingly, the bailout is not intended to help highly indebted developers complete their projects. Rather, it targets local governments (or local government-owned entities) to take over the projects and apply for loans from the PBOC or commercial banks to carry them out. Concerns remain about the effectiveness of the strategy, given that local governments could also struggle to complete projects, or how older creditors (such as suppliers, contractors, bondholders, etc. ) will be stacked in the event of new funding.
Outlook: Chinese cities are already saddled with heavy debt as they shoulder much of the spending on education, infrastructure, and health care (like mass COVID testing programs). The slowing real estate market may force more local governments to limit spending, adding yet another drag to China’s weakened economy, which grew just 0.4% in the second quarter. “The possibility of a vicious circle – falling house sales and prices, growing distress among developers and deteriorating local government finances – is concerning from a growth and financial stability perspective,” Oxford Economics wrote. in a research note.
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