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Struggling real estate sector weighs on China's property-driven growth model

Published Sep 12, 2022 08:50 Updated Sep 12, 2022 09:00
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The Chinese real estate market is undergoing a severe and drastic reshuffling process with the deflating property bubble spilling over into other sectors.

Property sales are expected to drop by 24.5% in 2022, according to a Reuters survey of analysts and economists in late August, a far bigger drop than the 10% fall forecast in the May poll.

The stakes are high as figures from America’s National Bureau of Economic Research indicate that real estate, including allied activities, contributes as much as 29% to China’s GDP and has been a key driver of its sustained economic growth.

Moreover, around 70% of household wealth in China is stored in property.

In this article:

  • Triggered by deleveraging
  • Mortgage strikes
  • Evergrande’s US$300 billion debt
  • A crisis of confidence
  • Spillover into other sectors

Triggered by deleveraging

The Chinese property sector started facing headwinds from the summer of 2020 after regulators stepped in to cut excess leverage, causing some developers to default on their debts.

Developers have since struggled to complete projects, resulting in homebuyers threatening to stop making payments.

The struggling sector is weighing on the outlook for the Chinese economy, which narrowly escaped a contraction in the second quarter of 2022 due to crippling COVID-19 lockdowns.

Moody's analyst Daniel Zhou said in a research note: "Uncertainty over China's growth prospects and concerns about project incompletion will largely drive weak homebuyer demand over the next 6-12 months.

"COVID-19 disruptions to business activity and sales execution will also dampen consumer sentiment, while buyers' expectation of weaker property prices will delay property purchases."

Mortgage strikes

A popular way of buying property in China is “pre-sales” where buyers pay for the property before it is built.

According to Julian Evans-Pritchard, a China economist at Capital Economics, pre-sales constitute 70-80% of new housing sales in China.

Developers often buy land, get loans on it to start construction, and then secure money from home buyers in pre-sales.

But many developers divert this money to fund new projects, instead of completing existing projects.

Since early 2022, thousands of home buyers in China have refused to pay their mortgages in protest of unfinished residential projects.

According to crowd-sourced estimates quoted by The New York Times, these home buyers who had been paying monthly mortgages at rates of 5% and above, have either stopped or are threatening to stop paying their mortgages in more than 300 unfinished housing projects in around 90 cities across China.

Home buyers who have gone on mortgage strikes believe that their money has been misused by property developers.

According to ANZ financial services, these mortgage strikes could impact 1.5 trillion yuan or US$222 billion worth of mortgages linked to unfinished apartments, accounting for nearly 4% of outstanding mortgages.

Surveys published by various firms indicated that mortgages at risk of defaulting could total between US$150 billion to US$370 billion.

Evergrande’s US$300 billion debt

The snowballing of the Chinese real estate crisis can be traced back to the 2021 fall of China’s second-largest real estate developer in terms of total sales— the Evergrande (HK:3333) Group.

The company had taken money in advance from more than 1.5 million property buyers and had not paid many suppliers.

Evergrande told creditors in January 2022 that it would unveil a preliminary plan by the end of July to restructure its US$300 billion of liabilities, which include US$20 billion of offshore bonds.

However, the developer missed that deadline and instead said it had only made "positive progress" toward a proposal.

According to, Evergrande has been divesting assets including property and its stakes in companies to repay some of its creditors.

Evergrande’s chair has also put his personal assets up for sale, including private jets.

Despite these efforts, the developer’s Hong Kong headquarters was seized by a lender last week after the company defaulted on a loan and twice failed to sell the building.

A crisis of confidence

Last month, Country Garden Holdings which was China’s top real-estate developer in 2021, reported a 96% drop in first-half profit after selling a third fewer homes than it did a year ago.

Country Garden said the market had struggled with weakening expectations, sluggish demand and declines in property prices.

It added: “All these exert mounting pressure on all participants in the property market, which has slid rapidly into severe depression.

Country Garden said that the resurgence of COVID-19 in cities across China has also slowed construction activity and weighed on its performance.

The Guangdong-based company eked out a small profit equivalent to US$89 million in the first six months of 2022, versus US$2.2 billion in the same period in 2021.

Although the company has long been regarded as one of China’s financially strongest developers, it has struggled to overcome a crisis of confidence that has caused buyers to back away from the Chinese property market.

Spillover into other sectors

China’s deflating property bubble has also spilled over into other sectors, including the country’s banks and asset managers that specialise in managing portfolios of troubled loans and distressed debt.

China Cinda Asset Management Co., the country’s largest bad debt manager, recently reported a 33% drop in first-half profits to US$653 million.

Cinda said the Chinese government was “faced with an increasingly complex, grim and uncertain development environment.”

The company’s peer, China Huarong Asset Management Co., reported a US$2.7 billion net loss for the first half, and described the country’s economic conditions as “extremely complex and difficult”.

Huarong’s international finance arm predicted that in the second half, China will face manifold challenges including pressure on investment, consumer spending and export trade.

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Struggling real estate sector weighs on China's property-driven growth model

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