Chinese economy: Funding ‘drying up’ after Evergrande crisis – real estate sector shaken | City & Business | Finance
December saw two major defaults among indebted Chinese developers, with Evergrande and Kaisa missing bond repayments totaling almost $500m (£369.47m). The dire situation in the property sector is now straining regional government finances, with the Financial Times reporting that local officials are increasingly looking for new ways to generate revenue, including forcing local businesses to purchase equipment from designated vendors by the government. In Shaoyang City, Hunan Province, local officials auctioned Evergrande projects in a bid to raise funds. An official told the FT: ‘Neither the government nor Evergrande have any money…Someone else has to fill the void.’
Craig Botham, China+ chief economist at Pantheon Macroeconomics, said the reports from the ground were “what you would expect”.
Speaking to Express.co.uk, he explained that local governments had seen a key source of revenue “dry up” leaving few alternatives.
“Revenue from land sales is about 40% of local government revenue, so it is very dependent on keeping land prices high.
“When real estate companies fail, they don’t have the money to bid in those auctions, so a lot of those auctions have failed.”
Although China’s central government has most of the taxing power, local governments have most of the spending obligations.
Real estate currently accounts for a disproportionate share of China’s GDP at around 30%, making the country highly industrial-minded.
While Evergrande has dominated the headlines, many other companies are under pressure.
In a late Wednesday filing to the Hong Kong stock exchange, R&F Properties said it would struggle to service debt as volatility in the property sector means “proceeds from certain asset sales the group is considering may not not materialize”.
With many real estate companies trying to increase sales to increase revenue, prices have in turn fallen.
Mr Botham explained that companies typically use both debt and presales – homes sold before construction is complete – to fund themselves.
However, with growing government restrictions on corporate debt levels, pre-sales have become increasingly important, with Evergrande offering discounts of up to 20% to boost sales.
However, this caused other developers to lower their prices to stay competitive.
A key part of China’s housing problems stems from the actions of the government itself which introduced a debt crackdown in 2020 known as the “three red lines”.
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The measures imposed strict limits on companies’ debt ratios in a bid to wean them off dependency.
But that has proven tricky for the real estate sector which has relied heavily on debt financing.
China has made various interventions in the real estate sector in the past, sometimes reducing its activities when needed.
Mr Botham said Beijing seemed “more committed” to regulation than ever before, suggesting there was “more political capital being invested”.
He thinks the Chinese government might fear a future market correction if it doesn’t act now – and would likely prefer a “controlled demolition” on its terms.
A 2022 outlook report from global ratings agency S&P also predicted that reforms are likely to continue with more defaults expected in the real estate sector.