Amidst the echoes of China Evergrande's liquidation, the repercussions of the country's ongoing property crisis continue to reverberate. A Hong Kong court's order for Evergrande's liquidation comes over two years after the company's default on dollar bonds triggered a perilous chapter in China's attempt to rein in one of the most significant real estate booms in history.
The fallout from the real estate sector's gradual collapse is poised to persist into this year, with China seeking avenues to drive growth in a global economy anticipated to decelerate for the third consecutive year. Real estate, plagued by deep-seated issues, remains a chief economic challenge for Chinese officials, overshadowing concerns like U.S.-China trade tensions and demographic shifts.
Economists emphasize the need for more forceful actions from policymakers to stabilize the real estate sector, preventing its troubles from disproportionately impacting the broader economy. The real estate market's slow-motion decline is seen as a critical factor in predicting China's economic performance.
Evergrande's default in 2021 marked the beginning of a real estate crunch, unveiling the excesses of debt-fueled development that the Chinese leadership, including Xi Jinping, is determined to curb. Developers like Evergrande had leveraged cheap credit for expansive construction projects, creating towering apartment blocks on land provided by local governments.
The COVID-19 pandemic in 2020 and Beijing's credit restrictions on property developers exacerbated the challenges. The result was a slowdown in home sales and a tightening of credit access for developers. With approximately $300 billion in liabilities, Evergrande ceased debt payments more than two years ago, setting off a chain reaction with over 50 other developers following suit.
The real estate market, once a cornerstone of China's economy, now poses a significant drag on growth. Real estate investment plummeted by 9.6% last year, pushing overall private-sector investment into negative territory. This decline not only directly impacts economic growth but also hampers consumer spending as falling prices erode household wealth.
Local government finances have also taken a hit, depriving them of revenue needed for infrastructure spending—an essential tool for Beijing to achieve growth goals. Officials, wary of reigniting a real estate bubble, have cautiously introduced stimulus measures, including home-buying relaxations, interest rate cuts, and ensuring banks have ample liquidity.
Despite these measures, indicators like new housing starts, housing completions, and home sales indicate a deeply distressed sector. Officially, home prices have only marginally declined, but economists estimate a more significant depreciation, with some suggesting a nationwide drop of around 20%.
In an attempt to bolster the real estate sector, China's central bank pledged $49 billion in new loans for policy banks in December. Further interest-rate cuts are anticipated, but doubts persist regarding their effectiveness. Some economists advocate for targeted measures, such as setting up a special fund to complete unfinished housing projects and encouraging struggling developers to sell projects to healthier peers.
Barclays predicts an additional 8% fall in real estate investment in 2024, citing a negative feedback loop between weak sales and developer defaults. The World Bank expects China's growth to slow due to property sector weakness, reinforcing the view that the real estate market remains a critical domestic risk.
As China grapples with the aftermath of Evergrande's downfall, the trajectory of the real estate sector remains a pivotal factor shaping the country's economic landscape. Moody's Analytics senior economist, Katrina Ell, emphasizes that the property market continues to be a focal point for domestic risks, underscoring the enduring challenges ahead.
