China’s housing market is heading for a new crisis that could be the country’s worst yet, The Wall Street Journal writes.
The bankruptcy of a major real estate developer, China Evergrande Group, two years ago triggered a wave of developer defaults, and the industry’s problems have had a negative impact on the Chinese economy as a whole.
Now, China’s largest private developer, Country Garden Holdings, is in a difficult position. Unlike Evergrande, whose problems were caused by excessive wastefulness, Country Garden’s difficulties are related to the withdrawal of investors and buyers from the real estate market.
The situation with Country Garden could pose much more serious problems for the Chinese economy than Evergrande’s default in 2021, the WSJ notes. Much of Country Garden’s operations are concentrated in industrial zones that have been the engine of growth for the Chinese economy in the best of times. Now, these regions are experiencing financial difficulties and facing an outflow of residents, making it likely to be difficult for them to cope with the collapse of a major developer.
Economists expect that the problems in the residential real estate market will have a negative impact on consumer confidence, which will prolong the decline in activity in the sector. Real estate and related industries account for about a quarter of China’s GDP.
“The whole industry is in trouble,” said Kenneth Rogoff, a Harvard University economics professor. Small and medium-sized cities are experiencing particularly serious problems.
Construction volumes have been exceeding demand for several years, leading to a huge oversupply of housing, and the market needs to be adjusted, Rogoff said.
“How do you prevent the Chinese population from panicking when they see that a significant part of their wealth could collapse? It’s not easy,” the expert says.
As of June 30, Country Garden was involved in more than 3 thousand projects involving millions of homes. The company’s total liabilities, including sold but not delivered homes, debts to suppliers and banks, as well as bonds, are estimated at $186 billion, with the bulk of them due within a year.
The developer recorded a record loss of about $7 billion in the first half of the year, writing down the value of a number of assets.
Last month, Country Garden missed interest payments worth $22.5 million on two issues of dollar-denominated bonds, but managed to find the funds to make them during a 30-day grace period, avoiding default. Chinese lenders have granted the company a grace period for repayment of some of the RMB bonds.
Country Garden’s new home sales in August were down 70% compared to the same month a year earlier. If sales do not recover, the developer faces default, analysts say.
