Bank loans

Unfinished buildings in China put billions in Chinese bank loans at risk

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

Fewer Chinese developers in the Global 500 reflect the slump in China’s property market as domestic demand and house prices plummet. The other two real estate giants that dropped out of the Fortune Global 500 list are Sunac China Holdings and China Resources Land.

Chinese developers have left millions of pre-sold homes unfinished due to liquidity issues. As a result, most Chinese banks are facing a halt in mortgage payments or a “mortgage strike” – where buyers refuse to pay mortgages unless developers resume construction.

According MacroMicro, a global economic data research company. Most notices accused Chinese banks of misusing pre-sale funds.

S&P Global estimated that 2.4 trillion yuan (about $355 billion) in mortgages could be at risk of default. This represents approximately 6.5% of all outstanding mortgages.

The rating agency also predicts that home sales in China could fall by up to 33% this year amid the mortgage strike, which would further squeeze the liquidity of struggling developers and lead to more defaults, Bloomberg reported.

Recently, many Chinese developers have resorted to bond swaps and debt extensions to buy time to avoid defaults. However, according to S&P Global, at least 20% of rated Chinese developers are likely to become insolvent despite their efforts to buy time, as investors could pursue their rights in court or restructure their debt.

Defaulted developers in China have left many unfinished buildings behind, each representing a risk factor for loan-issuing banks as buyers may participate in nationwide mortgage strikes.

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

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

“China’s real estate sector is in a vicious circle – defaults have severely undermined investor and homebuyer confidence, leading to limited external financing and a drop in sales,” said Katherine Jiang, a Hong Kong-based financial analyst, Epoch Times. .

“The decline in sales is reducing developers’ operating cash flow and denting market sentiment, undermining property developers’ ability to access the debt and banking market and significantly affecting their financing cash flow. Homebuyers would also delay their purchase and opt for a wait-and-see approach. As a result, real estate sales will continue to fall and [property] prices will also drop.

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

The CCP policy behind the downfall of Chinese real estate giants

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

The company logo at the headquarters of China Evergrande Group in Shenzhen, Guangdong province, China, 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” compounded the problem. The three red lines are a series of debt thresholds, severely limiting 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, aimed at improving the financial health of the real estate sector by reducing developer indebtedness, improving debt coverage and increasing the liquidity. However, some large property developers, such as Evergrande, had failed to comply with the new regulations.

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 at very high interest rates. ‘she couldn’t repay.

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

“Beijing probably played a role in Evergrande’s collapse,” Huang said. “Since the housing reform in 1998, China’s private real estate enterprises have grown. But the CCP wants to regain control by transforming private companies into state enterprises.

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

Kathleen Li

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Kathleen Li has contributed to The Epoch Times since 2009 and focuses on China-related topics. She is a professional engineer, registered in civil and structural engineering in Australia.