China, real estate from a push to an obstacle to growth
There was a time when real estate China was the driving force behind Chinese economic growth. A growth which seemed unstoppable, which accompanied in a thunderous way a more trained geopolitical and diplomatic rise. All the risks that Beijing it has never (or perhaps had) never taken it under the diplomatic or military profile, it was taken by that driving force that has continued to grow, but too often playing with the thin red line between strategy and bet. Piling up debt upon debt.
2021 was the year of the moderately prosperous society and of third historical resolution. 2021 was the year of the centenary of the Communist Party of China and tensions with the United States by Joe Biden. But 2021 was also the year in which the propeller engine has jammed. Today, the real estate sector risks becoming an obstacle, a ballast to China’s prodigious economic growth. The story of Evergrande it has attracted the attention of the whole world and is symptomatic of a much wider phenomenon of which it represents nothing more than the tip of the iceberg.
Chinese real estate, all data for 2021
After months of speculation and forecasts, Caixin has in fact revealed i official data relating to the Chinese real estate sector for 2021, then outlining a scenario that is worrying to say the least for 2022. A fundamental year for China, which in a few weeks Beijing Winter Olympic Games and in October awaits the twentieth party congress that should crown Xi Jinping for a third presidential term, in discontinuity with the practice of the two mandates initiated by Deng Xiaoping.
According to data from Caixin, in 2021 the sales of new homes by the China’s top 100 real estate developers fell 3.5% to 11.1 trillion yuan ($ 1.8 trillion) in 2021. This is the first annual decline in more than a decade. Nearly 40% of the developers on the list saw performance degradation, and 36 recorded negative growth rcompared to 16 of 2020, as revealed by the China Real Estate Information report.
The losses of the industry giants are really exponentials. Evergrande has a debt exposure of just under 300 billion dollars and it has already officially defaulted on several offshore bonds. For the first time, Xu Jiayin’s company, a former richest man in China, dropped out of the top three on the industry list for the first time since 2014 due to slump in sales. While the company is still in fifth place, its contract sales have dropped 38.7% since 2020.
Evergrande? Just the tip of the iceberg
But be careful, the names of the groups in difficulty are many. Kaisa Group Holdings Ltd., Modern Land (China) Co. Ltd., and Fantasia Holdings Group Co. Ltd. they are among the real estate companies that have failed to pay their bonds in recent months. Guangzhou R&F Properties Co. Ltd. has asked bondholders to accept a six-month delay in the repayment maturity for 725 million dollars of dollar bonds maturing in January, in an attempt to avoid a default. The analysts of S&P Global Ratings wrote in a November report that defaults by Chinese developers are set to increase over the next six to twelve months.
Yes, because the lowest point may not have been touched yet. China Index Academy Ltd. expects the property sales measured by area decreased between 6.8% and 8.3% in 2022. How much has changed since the historic boom of 2020 when, as Caixin points out, sales of new construction properties measured by area rose by 2.6% to 1.76 billion square meters, while by value they increased by 8, 7% to 17.4 trillion yuan. The highest figures since the surveys on the subject began in 1991.
Real estate crisis and regulatory tightening: Xi’s common prosperity
But in 2021 something happened. 80% of developers did not reach their targets and fell. The measures introduced by the Chinese Central Bank, together with the “three red lines” policy indicated by the Party, have reduced the room for maneuver in the real estate sector, which was required to change the paradigm of action. And the rescue donuts that had been thrown several times in the past, even recently, have not arrived this time. Xi Jinping it is insisting on the rhetoric of common prosperity, in which there is no room for uncontrolled development and the debt and financial risk that the real estate sector has lived with for decades.
The decline in sales will put more financial pressure real estate developers this year, because they have traditionally relied heavily on income from presales and completions to finance new projects, pay interest on their debts, and repay maturing bonds. The decline in this key source of funding and regulatory limits on lending have already caused liquidity slumps for many developers.
Chinese real estate, the outlook for 2022: Beijing’s growth slows
And beware, because in 2022 Caixin expects far more defaults from Chinese real estate groups, with a further 10% decline in residential home sales. All of this can have a broader impact, along with another set of factors that could cause a slowdown in Chinese growth. The World Bank has just revised Beijing’s growth estimates for 2022 downwards, lowering them to just above 5%.
It is no coincidence that the last five-year plan has not set a specific growth target, but we cannot forget that the social pact implicitly signed between the Party and citizens is based on growth. For this reason, the government is expected to relax the squeeze a little in the coming months. 2022, between the Olympics and Xi’s third term, must inevitably go smoothly internally. Not only zero Covid, but also zero shocks.
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