October 18, 2021

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Evergrande crisis, a warning about the Chinese real estate market

Evergrande crisis, a warning about the Chinese real estate market

Giant Crisis Evergrande, that on Thursday, September 23, 2021, he had to pay an amount $84 million in interest Which you have not yet judged, will have limited consequences but a warning about a situation real estate market chino, according to analysts consulted by EFE.

The headquarters of the company is located in the city of Shenzhen, a model of the openness policy of the Asian country since the seventies, lengthening a passive Total more than 300 billion US dollars, of which $37,000 represents loans to be repaid before the end of the first half of 2022.

However, the company will not be considered to have officially incurred its first default until it passes 30 consecutive days from the expiration date, although next day 29 has another pending payment period of US$47.5 million.

How did Evergrande get into this situation?

The Chinese real estate sector began to rise in the late 1990s, when regulators at the time reached out to developers eager to take advantage of the Chinese brick boom.

Among them is Evergrande, founded in 1996, which is now feared will end with a suspension of payments, an order, according to British advisory Capital EconomicsIt won’t happen: “The Chinese central bank will intervene to avoid a domino effect,” he says.

The company notes that many of the problems Evergrande encounters stem from The latest regulations imposed on the sector To control their over-expansion, forcing them to reduce liabilities and offer ever larger discounts to preserve liquidity.

“We estimate that Evergrande has about 1.3 trillion yuan (US$201.165 million or €171,412 million) in pre-sale commitments, which equates to 1.4 million properties committed to completion,” the advisor notes.

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Residential buildings under construction at Evergrande Cultural Tourism City, a project developed by China Evergrande Group, in Taicang of Suzhou, Jiangsu Province, China September 23, 2021. Photo: Reuters

Housing bubble ‘puncture’

Among these regulations, the so-called “three red lines” stand out, which seek to prevent Chinese developers from accumulating a excessive responsibilityOr you have exceeded certain levels of leverage or you do not have enough liquidity to meet short-term debt.

Mortgage restrictions are also added for ‘Calm down’ soaring house prices, is unaffordable for many Chinese families, who have traditionally relied on the sector due to restrictions or mistrust of other investment channels.

The Chinese president settled in 2017, “Homes should be inhabited, not to speculate”, Xi Jinping, which has also fueled speculation about possible property tax reforms in line with his recent slogans. The state should redistribute its wealth more To avoid inequality.

But “puncturing” the bubble is not easy: in 2020, the country entered what is known as the “era of 10,000 yuan (€1,318 or $1,548)”, referring to the fact that Square meter remains above average of this amount for several consecutive months.

In August 2021, the residential square meter reached Beijing 68,835 yuan (10,653 US dollars or 9,076 euros) and in Shanghai65,003 yuan ($10,060 or 8,570 euros), up 10.11% and 11.63% year on year, respectively, according to the specialized Chinese portal city ​​house.

Meanwhile, in other smaller cities such as Qingdao (East), prices are feared to collapse after dropping 2.6% to 21,104 yuan (€2782 or $3,266).

Another problem is that more than 20% of the real estate park owned but not busy In “ghost apartment complexes”, especially in the interior of the country, they were built thanks to public spending that is now seen as excessive.

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In fact, there are already some small cities in China that put limits on how much home prices can drop to maintain “stability” and avoid a market crash.

Beijing to the rescue?

On the one hand, they (the authorities) want to instill discipline. On the other hand, they know they’re up against other promoters who get hurt and fall apart,” says Natixis’ chief economist for Asia Pacific. Alicia Garcia Herrero, which envisions a high debt writedown for Evergrande’s overseas bondholders.

Denny McMahonAn economic analyst at Trivium China, a consulting firm, told EFE that the central government “is not going to bail out Evergrande” but is betting on a restructuring led by local authorities.

This process will involve tearing up the company and focusing on real estate business, where its “true economic value” lies, to ensure the completion of the projects under implementation, something many of which will have to be transferred into the hands of other promoters.

In the meantime, the creditors will be negotiated to Delayed loan maturity Or, in the case of the eldest, offering equity in exchange for debt.

At the end of the road, McMahon predicts, a local government-owned company will “emerge as a strategic investor” to plug any remaining hole in Evergrande’s funding and help it “resume operations” normally.

Thus, China can protect a valuable sector, according to the economist Ziping Hongguan, reached 62.6 trillion US dollars in 2020, up from 33.6 trillion US dollars United State or a combination of the two United kingdomAnd France And Germany (31.5 trillion US dollars).

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According to McMahon, adding virtually all related activities – such as steel or cement production – account for the industry 30% of China’s GDP.

In addition, ensuring stability remains the main motto of the authorities, which seek to avoid “systemic risks”, as introduced by Xi himself, who had already warned in February 2019 that China cannot “avoid” financial risks, a task that now appears essential one year before the Congress of the Chinese Communist Party (CCP) in October 2022 at which it will be determined whether the president extends his term beyond 2023.