As the crisis facing the world’s most indebted real estate company rages on, many experts have remained cautiously optimistic that the nightmare was under control. But there are now growing fears that Evergrande’s potential collapse won’t be able to be contained as easily as many initially believed. Source: news.com.au
And there’s a reasonable chance it could end up shattering China’s wider growth model along with it.
Evergrande’s troubles began as China’s real estate market soared, with demand for homes in cities such as Beijing and Shanghai sending prices skyrocketing.
The company took out a string of loans and expanded rapidly, snapping up assets and making the most of China’s thriving economy.
But when property prices began to drop in smaller cities, and when the Chinese government rolled out measures to curtail over-the-top property borrowing, via its so-called “red lines” policy, it left Evergrande in the lurch, with mountains of debt totalling a whopping $408 billion.
Because the company is so massive – as China’s second largest property developer, Evergrande has around 1300 developments across 280 Chinese cities – there have been serious concerns its demise could have a spill over effect on other industries and the wider economy, and even cause a potential credit crunch.
Meanwhile, Australia is also facing a relatively unique risk from the potential Evergrande collapse, with many expecting the situation to have serious ramifications for China’s construction industry.
But according to an alarming article by Bloomberg’s Andrew Browne, Evergrande’s “controlled explosion” might not be so easily contained after all.
And Browne argues the nightmare “may eventually blow-up China’s entire economic growth model”.
The analysis explains that China’s growth model has long been based on the “doubtful” idea that demand for real estate is “inexhaustible”, which means prices will always rise.
But in reality, “migrant flows are drying up” – a trend exacerbated but not caused by the Covid pandemic – which means there’s nobody to buy all those shiny new apartments.
It’s a trend that’s already well and truly evident, with Rhodium Group director Logan Wright telling the Financial Times last week China had enough empty property to house more than 90 million people.
“It’s quite likely, then, that Evergrande was intended as a controlled explosion – one big enough to get the attention of other highly indebted real estate firms headed toward insolvency but not so big as to take down the entire property sector, and with it the Chinese economy,” Browne writes.
“That doesn’t mean that China will escape unscathed.
“While Browne and many other financial experts aren’t convinced the fallout from the Evergrande fiasco will be enough to trigger a global financial crisis on the same scale as 2008’s, he predicts that as property prices start to drop, it will impact consumption, which will slow down wider growth and prove disastrous for the overall property industry.
In other words, “a systemic threat is looming”.
“Beijing now faces an awesome challenge. It must shift the drivers of growth while re-engineering local governance and its entire fiscal system,” Browne writes.