The crisis engulfing the Chinese property sector appears certain to intensify in 2022 as companies face debt repayments in the new year that are double those of the final months of 2021, risking what one China expert calls a systemic crisis for the world’s second-biggest economy.
Although concerns about the stricken giant China Evergrande have receded in recent weeks behind a massive state-led restructuring operation, it missed a bond repayment of $255m (£190m) on Thursday and the debt problems that have pushed the second biggest developer in the country into default are blighting many other firms.
In total, China’s developers owe $19.8bn in dollar-denominated offshore debt in the first three months of 2022, analysts at Nomura said. That is almost twice as much as the $10.2bn they were faced with in the final quarter of 2021 – a burden that caused default at Evergrande and the threat of default at several other developers such as Kaisa.
Nor is there any respite in the second quarter of 2022, when they must find another $18.5bn.
The bond repayment burden threatens to worsen the crisis for developers, who have ridden a 30-year boom in the Chinese housing market on a business model based on cheap credit and never-ending demand from the country’s huge, upwardly mobile population.
But Xi Jinping’s anger at the sector’s excesses and his pursuit of “common prosperity” led to a crackdown that removed access to unlimited funding, and now key metrics are spelling the end of the good times. Prices fell 0.3% in November, the biggest fall since 2015, while the value of home sales plunged by 16.31% and new construction starts as measured by floor area fell 21.03%. Crucially, China’s population is shrinking with the number of marriages – and therefore demand for new properties from young couples – down 31% in the six years to 2019.
‘Everyone made the same bet’
Michael Pettis, professor of finance at Peking University, says the situation could morph into a systemic crisis that undermines the whole debt-ridden economy – the stuff of nightmares for Beijing’s political class, who are desperate to prevent contagion from the property crisis hurting ordinary Chinese.
“Everyone made the same bet on inexorably rising property prices, especially the developers, who levered to the hilt, overpaid for land at auctions, and scooped up as much real estate risk as they could take on,” he said.
“The problem of course is if property prices ever stop rising, because everyone has made the same bet everyone’s balance sheet starts unravelling at the same time, and it immediately becomes a systemic problem. That is what has happened in China.”
Debt to foreign investors are not the only problem. Developers owe billions of yuan to Chinese bondholders but, in addition, Nomura says they must also find 1.1tn yuan ($172bn) in backdated pay owed to construction workers before the lunar new year starts at the beginning of February. There were also reports that workers at subsidiaries of Evergrande in states such as Guangxi and Shanxi have gone on strike over unpaid wages.
“Failing to pay deferred wages could be severely punished by both the central government and related local governments,” the Nomura analysts said. “There is tremendous reputational risk for those developers and constructors that could not pay deferred wages in a timely manner, especially if social protests are triggered.”
Evergrande’s woes become apparent in September when it admitted it could not meet the most pressing of its mammoth $300bn debts or even complete the 1.6m homes it had already taken payment for. After much brinkmanship, it made some of its payments but eventually slipped into default in early December – later confirmed by rating agency downgrades.
The prospect of civil unrest over unpaid wages, unfinished houses, and uncertain return from wealth management products set up by developers is front and centre in Beijing’s battle to contain the fallout from the property sector’s problems.
‘This is a test case for China’
Although the Evergrande chairman and founder, Xu Jiayin, pledged this week that the company was going “full steam ahead” to finish homes that customers had paid for, Shasha Dai, managing editor at credit intelligence, data and analytics provider Reorg in New York, said the Chinese government was “deeply involved” in Evergrande’s restructuring and that the number one priority was to maintain “social stability”.
The government was “putting a mould around Evergrande” to make sure its troubles didn’t spill over to other developers, she said. The goal was for someone “reputable” to come in with access to finance, complete the buildings Evergrande has not finished, and get people into homes that they have paid for.
“Maintaining social stability is the government’s number one priority. They can’t have protests with people going round to offices demanding money back – it’s a bad image. Homebuyers have to get what they paid for.”
However, the spiralling nature of the problem might make it impossible even for Beijing, with all its levers of control, to contain given that so many developers could run into trouble. A report in October by S&P, for example, said that one-third of China’s listed developers could experience liquidity problems in the next 12 months.
As Prof Pettis says, the crisis has deep-seated roots and will not be easily solved.
“This isn’t about ‘bad apples’ or even bad policies,” he says, “so it cannot be fixed by firing the right people, putting some in jail and improving policy responses.”
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The impact will be felt far and wide if the contagion spreads, not least to China’s reputation for sound economic management. Tim Symes, a partner at the international law firm Stewarts in London and a specialist in insolvency and asset recovery, said the Evergrande restructuring could go on for years. But the wider question for China was important.
“This is a test case for China and could shape risk appetite globally, affecting inward investment.
“This is going to run and run and the fear is that China may favour its local creditors. Offshore bondholders will feel the loss and that will ripple through the world. It brings home the risks in lending to China.”