HONG KONG, Sep 20 (Reuters Breakingviews) – The ongoing bushfire in China Evergrande’s balance sheet (3333.HK) is spreading to the property market and beyond, and this is the gist. Authorities allow the struggling developer to falter on the brink of failure, but hoping the flames won’t incinerate the economy at large. It is a big political risk.
No industry has defied the Chinese Communist Party’s calls for financial discipline so successfully as real estate. It generates about a quarter of national production and, as local governments depend on land sales to finance budgets, it has an inordinate budgetary impact. The last time Beijing tried to cool house prices between 2013 and 2014, it had to back down as economic activity contracted as well. The unsuccessful attempt appeared to have emboldened the developers, who leveraged as much as possible. Evergrande’s debt peaked at more than 6 times its equity in 2016, according to data from Refinitiv. He still owes around $ 300 billion today, with $ 83.5 million in interest owed this week. Hong Kong stocks plunged 17% on Monday due to default issues.
President Xi Jinping wants investments to go into industrial improvements, not condominiums. But as long as ownership is considered risk-free, it will continue to attract an inordinate amount of capital. Households, for example, borrowed $ 1.2 trillion in 2020 even as income growth slowed, most of it in the form of mortgages. The only way to change attitudes is to produce controlled burning, as foresters do when they start planned fires to consume excess tinder and preserve healthy trees.
Things are certainly burning. Rhodium analysis shows that 16% of offshore dollar bonds issued by Chinese developers yield more than 30%. Stock prices of listed promoters have started to plunge; even before the last rout, Evergrande was already down 85% this year. Buyers hold back; sales volumes in 30 major cities fell 32% year-on-year in the first 11 days of September. Pressure index on bank balance sheets. Unsurprisingly, perhaps, manufacturing and service activity entered into monthly contraction.
Xi might be willing to pay a hefty price to take the pain out of the correction and avert total catastrophe within a decade. If he blinks, however, and runs away in the name of stability, his willingness to create homes “for living, not for speculating” could also ignite.
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– One of the major lenders of the China Evergrande group has set aside provisions for losses on part of its loans to the ailing real estate developer, while some creditors plan to give it more time to repay, Reuters reported on September 17, citing four bank executives. Evergrande is due $ 83.5 million in interest on September 23 for its March 2022 offshore bond. It has another $ 47.5 million interest payment due on September 29 for the March 2024 notes.
– New home prices in China rose at their slowest pace in months in August. Average new home prices in 70 major cities rose 0.2% last month after rising 0.3% in July, according to Reuters calculations based on data released by the National Bureau of Statistics.
Editing by Robyn Mak and Katrina Hamlin
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