- Hong Kong-listed Evergrande offshoot receives wind-up order
- Chinese government support for property likely to limit real-world implications
The decision by Hong Kong’s High Court to issue a winding-up order against China Evergrande (HKG:3333) wasn’t surprising given that the heavily indebted property developer was unable to present a viable restructuring plan. China Evergrande is a financing arm of Evergrande Real Estate.
But the subsequent liquidation comes just as Beijing has launched its latest wheeze to revive China’s ailing property sector. The new whitelist programme has been designed to make financing more accessible at a time when many domestic property developers are struggling to fund their existing debt obligations.
The scheme involves municipal authorities providing a list of local property projects deemed worthy of financing support. The aim is to both speed up and de-risk the loan approval process as it’s thought that the bulk of the recommended projects will be under development by state-owned enterprises — by all accounts the preferred option where Chinese homebuyers are concerned. Whether this will be enough to assuage the banking sector’s anxieties on the funding front is anybody’s guess.
China’s urban spaces are awash with delayed pre-sold homes, leading to a monumental funding shortfall of around 3.2tn yuan (£351bn), according to a 2023 analysis by Ting Lu, Nomura’s chief China economist. The problem is not going away overnight regardless of increased central government intervention. Analysts at Oxford Economics believe that we could be looking at a four to six-year timeline for developers to complete unfinished properties.
Although, homebuyers in China generally provide larger deposits than their western counterparts (even when buying off-plan), there is little incentive for banks to recommence loading up their balance sheets if residential prices are in retreat. And they certainly were over the second half of last year, due, at least in part, to an increase in secondary market volumes leading to excess supply in the market, arguably a consequence of the relatively high rate of multiple home ownership.
Housing prices in less developed urban areas of the country have fallen by around a fifth over the past three years, but market watchers were recently spooked when it emerged that prices in Beijing had contracted significantly at the tail-end of 2023 despite official figures saying otherwise.
Wider growth fears
The failure by developers to meet their home delivery obligations not only serves as a disincentive to home sales but the shortfall could also drag on the wider economy given that China’s property market has hitherto accounted for an outsized proportion of the country’s gross domestic product. Excessive leverage always raises speculation as to the danger of systemic risk (after all, we’ve been here before). However, ratings agency Fitch believes that the immediate impact on the Chinese banks it covers would be limited even if, as it anticipates, Beijing authorities prioritise homeowners’ claims over other creditors.
More than 90 per cent of Evergrande property assets are in mainland China, but there have been relatively few defaults on interest-bearing debt generated through domestic channels, whereas US dollar-denominated bonds issued in Hong Kong haven’t fared so well. Indeed, the country’s biggest non-state-owned developer by total sales, Country Garden (HKG:2007), defaulted on another US-dollar bond in late October
It's unlikely the Chinese government will let this new Evergrande setback hit its growth forecasts, in any case. "We believe construction of the pre-sold homes is unlikely to be affected immediately even if the mainland court recognises the liquidation order, as ensuring delivery of unfinished units remains a key policy priority for the Chinese government," said analysts at Fitch Ratings.
But does all this mean that UK investors will have to wait even longer for the keenly anticipated post-Covid bounce-back in China’s economy? The portents are mixed. Some take the view that Beijing’s ability to implement stringent capital controls and other interventionist financial policies will give way to a soft landing, but it might be rather too soft for others. S&P Global Ratings recently drew comparisons between China’s situation and the economic stagnation in Japan after the latter nation’s property bubble burst in 1991.
Culturally, it has been suggested that the Chinese psyche (unlike our own) may be geared towards long-term planning and generational investments. The trouble is that state controls on the financial services sector have limited the number of 'paper investments' open to Chinese investors – institutional and retail – hence the clamour for derivatives and mutual funds issued under China’s Qualified Domestic Institutional Investor programme. So, even though President Xi Jinping has commented that housing is “not for speculation”, it is little wonder that bubbles have developed in this central area of the economy.
