China’s property market readying for collapse? As Evergrande files for bankruptcy, another major developer Country Garden looking at 7.6 billion loss

According to the New York Times, the current property dilemma in China has resulted in a substantial amount of money leaving the country. This situation highlights not only the responsibility of Beijing, but it also reveals the true nature of the property surge in the city.

What began three years ago as an effort to control dangerous practices by home builders, followed by a subsequent deceleration in housing, has escalated rapidly this month.

The overall economy has come under danger, and the trust of customers, corporations, and financiers has been weakened. To this point, China's usually involved decision-makers have taken minimal action to alleviate worries and appear to be steadfast in lessening the nation's economic dependency on real estate.

The current situation in the Chinese real estate market is truly unparalleled, according to Charles Chang, the person responsible for corporate credit ratings for Greater China at Standard & Poor’s, as quoted by NYT.

Over the past 30 years, there has been a significant increase in China's population, with many individuals moving to urban areas in search of better economic prospects. To meet the growing demand for housing, developers struggled to construct modern apartments quickly enough. As a result, the real estate industry became a crucial driver of economic transformation. This sector not only created employment opportunities for millions of people but also served as a means for households to save money. Presently, the property sector contributes more than a quarter of the total economic output.

According to the New York Times, China's reliance on the real estate industry was highly profitable during its prosperous period characterized by an ongoing property market surge. However, this dependence has now become a burden due to years of excessive borrowing and over-construction. In the past, when China's economy was expanding rapidly, the negative consequences were masked by developers taking on more loans to settle their increasing debts. Nevertheless, China is currently facing difficulties in recovering from the impact of the global pandemic, which led to paralyzing lockdowns imposed by its leaders. Many of the country's economic challenges are now being traced back to issues within the real estate sector, as reported by the New York Times.

Currently, the expenditure of Chinese individuals has decreased due to a decline in property prices, significantly impacting their savings, which are mostly invested in real estate. Furthermore, the availability of employment opportunities associated with the housing sector, such as construction, landscaping, and painting, has noticeably declined.

Furthermore, the ambiguity surrounding the potential extent of the crisis is amplifying the fear among companies and small businesses, discouraging them from making expenditures.

According to a report by the New York Times, trust companies - financial establishments that manage large sums of money for wealthy individuals and businesses - are facing potential losses from loans they provided to real estate companies. This has caused frustration among investors who are now expressing their discontent. The New York Times suggests that the current issue with the property market is a consequence of decisions made by the government.

The authorities permitted developers to indulge in excessive borrowing in order to fund an expansion-oriented approach without considering the consequences for many years. However, the government unexpectedly and drastically stepped in last year to avert a disastrous housing market situation. As a result, the supply of affordable funds to China's largest real estate firms was abruptly halted, causing a financial strain for many of them.

Successively, the corporations started to collapse due to their inability to fulfill their financial obligations. According to a report from The New York Times, over 50 property developers from China have defaulted or faced difficulties in meeting their debt obligations during the past three years, as stated by credit ratings agency Standard & Poor's.

The recent failures have revealed the true face of China's real estate boom: relying on borrowing to fund construction is only successful when property prices continue to rise.

Nevertheless, despite the deteriorating property crisis, Chinese authorities have refused to intervene with a substantial bailout plan. Instead, they have chosen to implement minor measures such as loosening mortgage criteria and reducing interest rates. The New York Times referenced an article from the state-controlled Economic Daily, which emphasized that the implementation of recent policies would require time: "We should recognize that effectively managing the risk will not happen overnight, and the market needs to show some level of patience."

The authorities have simply accepted the consequences of the real estate crackdown, as even the businesses that struggle to settle their financial obligations have managed to construct and provide residential units.

According to a report from the New York Times, China Evergrande encountered a default situation with a massive debt of 300 billion UYD in 2021. However, despite this setback, they successfully completed and handed over 300,000 apartments out of the over 1 million for which they had received payments but hadn't finished before their downfall.

Evergrande sought legal protection from bankruptcy in the United States on Thursday. Nevertheless, a considerable transformation has occurred over the past months. Families scaled down their expenditures on significant acquisitions, leading to a sudden decline in apartment sales. Consequently, the prospects of Country Garden, a prominent player in the real estate industry, which was previously hailed as an exemplary model by the government, have been significantly affected.

According to the New York Times, the business is currently expecting a decline of up to 7.6 billion USD in the initial six months of the year. Additionally, the company stated that it is currently undergoing its greatest obstacle yet in its thirty-year existence.

Country Garden is facing an imminent deadline to secure enough funds in order to fulfill its obligations for interest payments on certain bonds. Failing to do so would result in the company following in the footsteps of other firms that have defaulted. Furthermore, Country Garden is burdened with an enormous sum of unpaid bills, totalling in the hundreds of billions of dollars.

These changes have also worried individuals looking to purchase homes, who were already cautious. According to the China Real Estate Information Corp, in July, new home sales at the top 100 property developers in China decreased by 33% compared to the previous year, as reported by the New York Times.

In June, there was a notable decline of 28% in sales. Moreover, the investors are also concerned about the sluggish response of policymakers in averting a more significant crisis.

"I believe that the problems are still unsolved and there isn't a satisfactory solution yet," stated Ting Lu, the main economist for Nomura in China, as reported by the New York Times. Lu and his team have additionally cautioned that declining house sales and developers unable to meet their financial obligations could trigger a series of events that pose a threat to the overall economy.

The worries have extended to other markets too. In the bustling city of Hong Kong, where numerous major Chinese firms are publicly traded, trust has plummeted dramatically causing stocks to plummet into a bear market, with a decline of 21% since their highest point in January. According to the New York Times, investors have withdrawn a massive sum of 7.5 billion USD from Chinese stocks in just the past two weeks.

As per the report by New York Times, China's shadow banking sector, which comprises of financial trust firms, is also experiencing difficulties in the real estate sector. These companies provide investment opportunities with better yields compared to traditional bank deposits and frequently invest in real estate ventures.

In recent times, there have been new problems arising. Two Chinese companies that are listed in the stock market have alerted that they had put their money into Zhongrong International Trust, a company responsible for handling approximately 85 billion USD worth of assets. These companies have stated that Zhongrong has not fulfilled its obligation of paying them the amount they are owed.

In the meantime, reports from the New York Times reveal the appearance of several videos where a group of furious Chinese investors can be seen congregating in front of Zhongrong's headquarters in Beijing. These investors demand the reimbursement of their funds and express their desire for an explanation. The exact date of the protest remains uncertain; however, these videos were recently shared on Douyin, the Chinese equivalent of TikTok.

The protest had echoes of previous displays of resistance in China connected to the housing problem. Although these incidents are not common, there are a couple of recent instances worth mentioning.

During the month of February, a multitude of retired individuals in Wuhan expressed their dissatisfaction with the authorities, taking a stand against reductions in the medical insurance benefits provided by the government specifically for seniors. These reductions served as an indication of the difficulties faced by local governments, partly due to the decline in the real estate industry which had negatively impacted land sales, thus affecting a dependable source of income.

In the previous year, numerous homeowners chose not to make payments for their mortgage loans on incomplete apartments. Certain individuals even created videos on social media platforms to express their protest, while groups of homeowners organized and monitored boycotts through online platforms.

Both protests caught attention, but the energy eventually diminished as the authorities stepped in to restrict conversations on social media and took certain measures to alleviate the tensions. According to an article from the New York Times, a recent video filmed outside Zhongrong's premises displayed a lack of demonstrations, but instead showcased the presence of police vehicles parked in and around the area.

(This news article is shared from a syndicated source. Apart from the title, the content has not been created or modified by OpIndia staff)