Evergrande & China' Real Estate Crisis
China's Big Short?
Summary
How Evergrande Became China’s Biggest Financial Headache
Evergrande was China's largest real estate developer by 2016 and is now the world's most indebted developer with $300+ billion in liabilities.
Its debt situation unsettled global markets, leading to volatility and concern.
In December, Evergrande defaulted on two bond coupons, preparing for a major debt restructuring process.
Evergrande's issues have ripple effects in China's broader property sector and economy.
Chairman Mr. Hui started Evergrande in the late 1990s, capitalizing on China's urban boom and its post-2008 financial crisis stimulus package.
Evergrande, using land as collateral for loans, expanded rapidly, controlling land five times the size of Manhattan and diversifying into other businesses.
Chinese President Xi Jinping's financial risk controls began questioning Evergrande's debt-driven growth.
China's property market dynamics were shaped by local governments selling land to developers and consumers pre-buying homes.
Excessive borrowing led to concerns about the market's stability; China introduced "three red lines" to regulate property developers' debt.
Evergrande's struggles became apparent in summer, culminating in a default on offshore debts, shaking global confidence in the property sector.
Major global investors like BlackRock, Goldman Sachs, and HSBC had invested heavily in Evergrande, expecting China to support the property sector.
By late 2015, China started curbing its system-wide debt, with real estate accounting for a significant portion of the country's dollar-denominated bonds.
Evergrande faced liquidity scares in 2020 and 2021, prompting short-term solutions and triggering nationwide protests over halted construction and missed payments.
Despite past support from authorities, Chairman Hui's relationship with Beijing became strained during the crackdown on property speculation.
The Guangdong government intervened in Evergrande, leading to speculation about potential government takeover.
Beyond Evergrande, numerous Chinese developers have defaulted, raising concerns about broader impacts on the global economy.
The Chinese government has attempted to stabilize the economy by releasing liquidity, cutting borrowing costs, and easing some developer restrictions.
The Evergrande crisis signifies a shift in China's economic model, moving away from debt-fueled expansion.
Has China’s housing market tanked?
China's property market faced a major crisis between 2020 and 2022, with complexes becoming ghost towns and residents boycotting mortgages.
The crisis revealed vulnerabilities in China's real estate sector, with Evergrande, a major developer, defaulting on significant bond debts.
Evergrande's founder, Hui Kayan, saw his wealth drop by $17.2 billion in 2021, with a net worth of $3 billion in 2023.
Homebuyers experienced issues with uncompleted flats and were threatened or detained when they tried to protest.
China's property industry, contributing 30% to GDP, has been crucial for its economy.
The pre-sale housing system in China puts homebuyers at risk; they pay the full property cost upfront, with the money going directly to the developer's account.
Rapid urbanization from the 1990s fueled the property boom, with government reforms in 1998 shifting to a market-based approach.
Evergrande, established in 1996, benefited from the reforms, growing massively to own projects across 280 cities in China.
The COVID-19 pandemic and Beijing's "three red lines" borrowing policy in response to falling property prices hurt many developers, including Evergrande.
Experts argue that the policy was introduced at the wrong time and that the property sector had grown too large.
By January 2023, home prices stabilized due to government interventions, including mortgage rate reductions and project subsidies.
However, China's falling population presents new challenges, with the working population decreasing and youth unemployment rising.
The decline in urbanization suggests that demand in the housing market might have peaked.
Experts predict stabilization in the housing market with reduced supply in the upcoming years, marking a potential turning point in China's real estate story.
The Great Fall Of China's Housing Market: Who Will Pay The Price?
Anger has surged among Chinese homebuyers as property developers halt construction; many are refusing to make mortgage payments.
China's property boom, crucial to its economy, is ending, with the realization that property prices cannot rise indefinitely.
Over the last 40 years, a significant migration saw rural farmers move to urban centers, with urbanization rates now at 64%.
Many projects are now halted, with around 9% of housing projects becoming 'rotten tail buildings', affecting 7.3 million people.
Homebuyers, in desperation, have threatened mortgage boycotts in over 100 cities, with some resorting to street protests.
The Chinese government responded by cutting mortgage interest rates and supporting project completions.
40% of Chinese developers are now financially distressed, halting work on 20% of their projects.
China's housing market evolution began post-Mao, with the introduction of private housing in the late 1970s and 1980s.
Developers could use pre-sale proceeds to fund constructions, but many misused these funds, leading to halted projects.
The Chinese real estate market grew exponentially, with China building five times the combined homes of the US and Europe.
The decline of major developers, like Evergrande, impacted confidence in the housing market.
China's real estate value, twice that of the US and thrice that of Europe, is seen as illogical and unsustainable.
The global concern is whether China's property debt crisis will trigger a financial contagion like the 2008 crisis.
While the central Chinese government has the resources to affect the market, they have been passive, leaving many in limbo.