Evergrande’s role in China’s property crisis
After years of warnings that led to global rating agencies cutting the Chinese government’s credit rating in 2017, the ruling communist party cracked down on real estate debt in 2020. It imposed controls known as “three red lines” that prohibited heavily indebted developers like Evergrande from borrowing more to pay off bonds and bank loans as they matured.
Fears of a possible Evergrande default in 2021 rattled global markets, but they eased after the Chinese central bank said its problems were contained and Beijing would keep credit markets functioning. Evergrande was one of the biggest of many developers that failed to repay their creditors.
Chinese home buyers often pay up front for apartments before they’re even built. The credit crunch for Evergrande and other developers led them to suspend construction, leaving many projects in limbo. The slowing of home purchases and building rippled throughout the economy, hitting demand for construction materials, appliances and even vehicles at a time when China was also contending with disruptions caused by the COVID-19 pandemic.
Since most Chinese families have their wealth tied up in property, the anemic housing market has been a major factor crimping consumer spending.
The property downturn grinds on
There has been some recovery in the housing sector, but home prices and investment have continued to fall.
Before the crackdown on borrowing, real estate accounted for some 20% of China’s economy. When spending on steel and copper for construction, furniture and other related purchases was added in, estimates of its share of the economy rose to about a third.
China’s leaders have sought to get developers to finish projects and deliver apartments that already were paid for, providing billions in lending and subsidies. They’ve encouraged local governments to buy up excess apartments to serve as affordable housing, and relaxed down payment and mortgage requirements.
They’ve also lifted many restrictions on purchases of homes for investment purposes in major cities, a move that analysts at HSBC Global Investment Research described as “surprising” as they came earlier than expected.
Sales and home prices were expected to fall further in August, they said in a recent report.
“We think it’s a positive change showing government’s enhanced proactiveness in rolling out measures, which will help strengthen market confidence and address the concern on stimulus being too late,” it said.