Two years ago it was the default of property developer Evergrande that symbolised the scale of problems in Chinese real estate. Evergrande had racked up USD 340 billion of liabilities and become the world’s most indebted property developer. Now it appears that China’s biggest private sector developer, Country Garden, is heading for default after failing to make a payment on an offshore bond.
Country Garden was thought more stable but its problems now show both the deterioration in the sector – with sales drying up and thousands of stalled developments across China – and the difficulties for Beijing in getting to grips with a long crisis that has gripped the world’s second-largest economy. Authorities have tried to strike a balance between providing too much stimulus or not enough. But it doesn’t seem to be working.
The turmoil among property developers is significant for China because construction and real estate has been the engine of much of its growth. Property and related industries have contributed around 20% or more of GDP.
For years, China’s real estate developers drew on offshore and onshore bond issuance to support their mainland development activity. Developers often sell apartments before they are completed, using the funds to invest in new developments elsewhere. But when policymakers sought to restrict new borrowing with the strict “three red lines” policy in 2020, developers’ old fundraising model collapsed.
Most developers have also faced plummeting sales amid waning consumer confidence, compounding developers’ liquidity concerns. More than half of the biggest 50 developers in 2020 have now gone into default. Bloomberg figures show Chinese developers have defaulted on around USD 115 billion of the USD 175 billion in outstanding offshore US dollar bonds since 2021. A bigger pile of onshore bank loans also face restructuring or rollovers.
Source: Financial Times
China’s authorities are finding it difficult to shift the historic growth model and try to reallocate resources away from property, particularly when it has massive asset linkages to household and to local governments, and to the entire financial system. The implications for Australian exports to China are obvious, whether iron ore, natural gas, coal or lithium. Weakness in the Chinese economy will ultimately affect us too.
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