Unfinished buildings in China put trillions of Chinese bank loans at risk

In the midst of the real estate debt crisis, China Evergrande Group and two other Chinese real estate giants dropped from the Fortune Global 500 in 2022, reducing the number of Chinese real estate developers to five from eight last year.

Fewer Chinese developers in the Global 500 reflects the collapse of China’s real estate market as domestic demand and house prices plummet. The other two real estate giants that fell off the Fortune Global 500 list are Sunac China Holdings and China Resources Land.

Chinese developers left millions of pre-sold housing unfinished due to cash flow problems. As a result, most Chinese banks are facing a suspension of mortgage payments or a “mortgage strike,” in which homebuyers refuse to pay their mortgages unless developers resume construction.

According to MacroMicro, a global economic data research firm, more than 327 unfinished pre-sale apartment mortgage strike notices have been issued in China as of August 13. Most of the notices accused Chinese banks of abusing presale funds.

S&P Global has estimated that 2.4 trillion yuan (about $ 355 billion) of mortgages could be at risk of non-payment. This equates to approximately 6.5 percent of all outstanding mortgages.

The ratings agency also predicts that home sales in China could drop as much as 33% this year during the mortgage strike, further squeezing liquidity from troubled developers and leading to more defaults, Bloomberg reported.

Recently, many Chinese developers have resorted to bond swaps and debt extensions to buy time to avoid default. However, according to S&P Global, at least 20% of valued Chinese developers are likely to become insolvent despite their efforts to buy time as investors could enforce their claims through the courts or debt restructuring.

Defaulting developers in China have left many buildings unfinished, each of which poses a risk factor for lending banks as buyers can participate in mortgage strikes nationwide.

A research paper published by the National Bureau of Economic Research (pdf), an American think tank, has estimated that the real estate sector makes up 29% of China’s GDP and that a 20% decline in real estate activity could lead to a decline in real estate. 5-10%. in GDP.

Despite Beijing’s recent attempts to bolster the country’s real estate markets, combined sales of China’s top 100 real estate developers in July fell 29% since June and 40% year-over-year, according to data released by China Real Estate Information Corporation. , a Chinese real estate data provider.

“The real estate sector in China is in a vicious circle: delinquencies have severely dwarfed the confidence of investors and home buyers, resulting in limited external financing and declining sales,” Katherine Jiang, a headquartered financial analyst, told The Epoch Times. in Hong Kong.

“The decline in sales reduces developers’ operating cash flows and affects market sentiment, jeopardizing the ability of real estate developers to access the debt and banking markets and significantly impacting financial cash flow. Homebuyers would also delay their purchase and opt for a wait-and-see approach. As a result, real estate sales will decline further e [property] prices will also drop “.

For example, Skyfame Realty, a Chinese private real estate developer, had all its bonds on the Hong Kong Stock Exchange suspended on June 28 after it failed to repay a secured loan. Before disclosing the default, the company revealed on June 16 that it was under “unprecedented liquidity pressure”.

The CCP policy behind the fall of the Chinese property giants

Evergrande, China’s second-largest property developer by sales, was ranked 122nd on the Fortune Global 500 list in 2021. However, that same year it went bankrupt, shocking the market as the most indebted real estate company in the world.

The company logo on the China Evergrande Group headquarters in Shenzhen, Guangdong province, China on September 26, 2021. (Aly Song / Reuters)

In 2021, Chinese real estate giants, including Evergrande, Fantasia and Kaisa, fell into a debt crisis and China’s “Three Red Lines Policy” exacerbated the problem. The three red lines are a series of debt thresholds, which severely limit the borrowing capacity of some property developers.

The People’s Bank of China and the Ministry of Housing introduced the three red lines policy in August 2020, with the aim of improving the financial health of the real estate sector by reducing developer leverage, improving debt coverage and increasing liquidity. However, some major real estate developers, such as Evergrande, failed to meet the new regulation.

Chinese economist Huang Jun told The Epoch Times that the main reason for Evergrande’s collapse was that state-owned banks stopped lending, knowing that Evergrande had issued bonds with very high interest rates, which it could not repay.

Huang Jun is the chief economist of the China Enterprise Capital Alliance and a member of the research committee of the Asian Real Estate Association. He currently resides in the United States.

“Beijing probably played a role in the Evergrande collapse,” Huang explained. “Since the housing reform in 1998, Chinese private real estate firms have grown. But the CCP wants to regain control by transforming private enterprises into state-owned enterprises ”.

Huang mentioned the CCP’s long-standing economic philosophy, “state-owned enterprises advance, private sector withdraws,” a principle that suppresses free-market economics and strengthens state control. Since the early 2000s, the CCP has promoted the dominance of state-owned enterprises at the expense of the private sector.

Kathleen Li

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Kathleen Li has collaborated with The Epoch Times since 2009 and focuses on China-related topics. She is an engineer with a degree in civil and structural engineering from Australia.

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