Fantasia, a smaller Chinese property developer, insisted two weeks ago that it would have no trouble paying off a $205 million bond. A reservation had already been made in the books, a Hong Kong bank had already pledged $142 million in financing.
However, when the amount for the repayment really had to be transferred on Monday, it remained silent. The loan was not paid off, and with that the formal bankruptcy of the company is very close. Trading in Fantasia shares on the Hong Kong Stock Exchange had already been halted on September 29.
Evergrande, one of China’s largest real estate companies, is not the only company in the sector to be in serious trouble. On June 30, this group had a debt of more than 300 billion dollars (260 billion euros), and so far it has not been able to reduce it substantially. This will only work if the company can sell real estate, but there is hardly anyone who wants to get into it now.
Evergrande’s problems started when China’s central bank, the PBOC, released the “three red lines” in August. They made it impossible for project developers to borrow money if they had too much debt. Old debts suddenly could no longer be paid off with new loans, and there was little money left to put into new projects.
The lack of liquidity has meanwhile affected the entire sector, also because real estate companies lent each other loans that they can no longer pay off. For example, Country Garden, one of the three major Chinese real estate companies, still has a claim on Fantasia of 105 million dollars. It also turned out to be irrecoverable on Monday. The share price of Country Garden in Hong Kong fell by 4.8 percent on Tuesday.
Project developer Sinic is also virtually broke: on October 18, the company has to pay off about 246 million dollars, but that will probably not work. Sinic is therefore as good as bankrupt.
Foreign investors
The question now is not only whether Evergrande will fall, but whether it will also drag the rest of the real estate sector along. And then the rest of the Chinese economy. And maybe the world economy too. Speculation abounds, but no one can say for sure. Not only because a hard, uncontrolled fall from Evergrande is far from certain, but also because the situation is incredibly complicated.
For example, there are both foreign and Chinese parties that have invested in the national real estate sector, resulting in domestic and foreign debt. It is clear that the foreign creditors are at the back of the queue if they want their money back, but that may not be very harmful. Their investments are also not so large that they easily fall over if they do not get anything back. In Evergrande’s case, it concerns $20 billion, out of a total debt of $300 billion.
More dangerous is loss of trust. Foreign investors may see China as an unreliable partner, as a country where you no longer know what rules the government will come up with next, and what effect that will have on your investments. Foreign parties may then become more hesitant with new investments.
Also read: Why does the Chinese Evergrande have such an impact on the international stock markets? And four other questions
Nobody knows how far the Chinese government really wants to go in cleaning up the sector. There has been a bubble for a long time. In a purely market-driven economy, this would probably have exploded sooner, but in the Chinese economy the government, or rather the Communist Party of China (CPC) plays a much larger role than in the vast majority of other countries.
Land prices
According to analysts, the real estate sector was actually ripe for correction in 2014 or 2015. After the economic crisis of 2008, China had pumped a lot of money into the economy, mainly to prevent it from being dragged into a global crisis. That worked, but it did mean that too much money was invested in infrastructure and real estate. Too much, because there was an oversupply of residential complexes, some of which were later demolished.
There are also problems surrounding the foundation of the real estate market: land prices. For a long time, local governments depended on the sale of land for a large part of their income. Real estate developers were happy to buy it up, for ever higher prices. They didn’t always do something about it right away. They speculated that the value would continue to increase, which it continued to do. Only now are many real estate companies struggling with large areas of land that are decreasing in value.
The companies have also borrowed a lot in informal circuits, through new financial constructions – think of small private investment funds, or loans from private individuals at high rates. That seemed useful. For example, the more risky debts did not end up with state banks. But those debts do exist, and it is precisely these debts that do not make the situation and possible restructuring any easier.
No free fall
Hong Kong economist Andy Xie states in a recent analysis that the Chinese government will probably again shy away from really thoroughly reorganizing the real estate sector. Even when other large Chinese companies, such as insurer Anbang and the conglomerate HNA, recently ran into problems, the government did not let them fall into free fall. Xie rather sees a partial and controlled restructuring in which the government plays a major role behind the scenes. Most other analysts still bet on that. It best protects the Chinese economy in the short term.
Xie does not think such an approach is healthy: it would be better to put real work into a new economic structure. It should be based much less on investment in infrastructure and much more on consumption growth. Such a pattern would better suit a more developed society where most of the infrastructure has already been completed, and avoid wasting money on infrastructure projects that are no longer really needed to further develop the country. The Chinese government has been wanting to go that way for a long time, but it hasn’t really succeeded yet.
This is partly due to the real estate sector. Because the prices there are so high, buyers are forced to put a large part of their budget into buying a house and paying off their mortgage. With lower real estate prices, more money could flow into consumer purchases.
The government may have supported insurer Anbang and conglomerate HNA, but Chinese President Xi Jinping has certainly not been a soft healer lately. He did not shy away from it, for example, by allowing large parts of the stock market value of companies such as Jack Ma’s Alibaba to evaporate. Who knows, he might even dare to undertake the thorough restructuring that Andy Xie would consider the most healthy for the Chinese economy.
Xi has two goals that he cannot achieve at the same time. He wants to stop housing and land speculation and make homes more accessible to the common man. If he succeeds in doing so, or if he at least seems to be putting in enough effort to do so, it helps justify his needing to stay in power any longer.
But its other goal is stability. If a cold restructuring leads to chaos and a weakening of economic growth, it is bad for stability. And he desperately needs it if he wants to manage at least another five years in office at the CPC Party Congress next year.
While Xi is keeping his cards tight for now, the real estate sector is crumbling a little further every day.
Fantasia, a smaller Chinese property developer, insisted two weeks ago that it would have no trouble paying off a $205 million bond. A reservation had already been made in the books, a Hong Kong bank had already pledged $142 million in financing.
However, when the amount for the repayment really had to be transferred on Monday, it remained silent. The loan was not paid off, and with that the formal bankruptcy of the company is very close. Trading in Fantasia shares on the Hong Kong Stock Exchange had already been halted on September 29.
Evergrande, one of China’s largest real estate companies, is not the only company in the sector to be in serious trouble. On June 30, this group had a debt of more than 300 billion dollars (260 billion euros), and so far it has not been able to reduce it substantially. This will only work if the company can sell real estate, but there is hardly anyone who wants to get into it now.
Evergrande’s problems started when China’s central bank, the PBOC, released the “three red lines” in August. They made it impossible for project developers to borrow money if they had too much debt. Old debts suddenly could no longer be paid off with new loans, and there was little money left to put into new projects.
The lack of liquidity has meanwhile affected the entire sector, also because real estate companies lent each other loans that they can no longer pay off. For example, Country Garden, one of the three major Chinese real estate companies, still has a claim on Fantasia of 105 million dollars. It also turned out to be irrecoverable on Monday. The share price of Country Garden in Hong Kong fell by 4.8 percent on Tuesday.
Project developer Sinic is also virtually broke: on October 18, the company has to pay off about 246 million dollars, but that will probably not work. Sinic is therefore as good as bankrupt.
Foreign investors
The question now is not only whether Evergrande will fall, but whether it will also drag the rest of the real estate sector along. And then the rest of the Chinese economy. And maybe the world economy too. Speculation abounds, but no one can say for sure. Not only because a hard, uncontrolled fall from Evergrande is far from certain, but also because the situation is incredibly complicated.
For example, there are both foreign and Chinese parties that have invested in the national real estate sector, resulting in domestic and foreign debt. It is clear that the foreign creditors are at the back of the queue if they want their money back, but that may not be very harmful. Their investments are also not so large that they easily fall over if they do not get anything back. In Evergrande’s case, it concerns $20 billion, out of a total debt of $300 billion.
More dangerous is loss of trust. Foreign investors may see China as an unreliable partner, as a country where you no longer know what rules the government will come up with next, and what effect that will have on your investments. Foreign parties may then become more hesitant with new investments.
Also read: Why does the Chinese Evergrande have such an impact on the international stock markets? And four other questions
Nobody knows how far the Chinese government really wants to go in cleaning up the sector. There has been a bubble for a long time. In a purely market-driven economy, this would probably have exploded sooner, but in the Chinese economy the government, or rather the Communist Party of China (CPC) plays a much larger role than in the vast majority of other countries.
Land prices
According to analysts, the real estate sector was actually ripe for correction in 2014 or 2015. After the economic crisis of 2008, China had pumped a lot of money into the economy, mainly to prevent it from being dragged into a global crisis. That worked, but it did mean that too much money was invested in infrastructure and real estate. Too much, because there was an oversupply of residential complexes, some of which were later demolished.
There are also problems surrounding the foundation of the real estate market: land prices. For a long time, local governments depended on the sale of land for a large part of their income. Real estate developers were happy to buy it up, for ever higher prices. They didn’t always do something about it right away. They speculated that the value would continue to increase, which it continued to do. Only now are many real estate companies struggling with large areas of land that are decreasing in value.
The companies have also borrowed a lot in informal circuits, through new financial constructions – think of small private investment funds, or loans from private individuals at high rates. That seemed useful. For example, the more risky debts did not end up with state banks. But those debts do exist, and it is precisely these debts that do not make the situation and possible restructuring any easier.
No free fall
Hong Kong economist Andy Xie states in a recent analysis that the Chinese government will probably again shy away from really thoroughly reorganizing the real estate sector. Even when other large Chinese companies, such as insurer Anbang and the conglomerate HNA, recently ran into problems, the government did not let them fall into free fall. Xie rather sees a partial and controlled restructuring in which the government plays a major role behind the scenes. Most other analysts still bet on that. It best protects the Chinese economy in the short term.
Xie does not think such an approach is healthy: it would be better to put real work into a new economic structure. It should be based much less on investment in infrastructure and much more on consumption growth. Such a pattern would better suit a more developed society where most of the infrastructure has already been completed, and avoid wasting money on infrastructure projects that are no longer really needed to further develop the country. The Chinese government has been wanting to go that way for a long time, but it hasn’t really succeeded yet.
This is partly due to the real estate sector. Because the prices there are so high, buyers are forced to put a large part of their budget into buying a house and paying off their mortgage. With lower real estate prices, more money could flow into consumer purchases.
The government may have supported insurer Anbang and conglomerate HNA, but Chinese President Xi Jinping has certainly not been a soft healer lately. He did not shy away from it, for example, by allowing large parts of the stock market value of companies such as Jack Ma’s Alibaba to evaporate. Who knows, he might even dare to undertake the thorough restructuring that Andy Xie would consider the most healthy for the Chinese economy.
Xi has two goals that he cannot achieve at the same time. He wants to stop housing and land speculation and make homes more accessible to the common man. If he succeeds in doing so, or if he at least seems to be putting in enough effort to do so, it helps justify his needing to stay in power any longer.
But its other goal is stability. If a cold restructuring leads to chaos and a weakening of economic growth, it is bad for stability. And he desperately needs it if he wants to manage at least another five years in office at the CPC Party Congress next year.
While Xi is keeping his cards tight for now, the real estate sector is crumbling a little further every day.
Fantasia, a smaller Chinese property developer, insisted two weeks ago that it would have no trouble paying off a $205 million bond. A reservation had already been made in the books, a Hong Kong bank had already pledged $142 million in financing.
However, when the amount for the repayment really had to be transferred on Monday, it remained silent. The loan was not paid off, and with that the formal bankruptcy of the company is very close. Trading in Fantasia shares on the Hong Kong Stock Exchange had already been halted on September 29.
Evergrande, one of China’s largest real estate companies, is not the only company in the sector to be in serious trouble. On June 30, this group had a debt of more than 300 billion dollars (260 billion euros), and so far it has not been able to reduce it substantially. This will only work if the company can sell real estate, but there is hardly anyone who wants to get into it now.
Evergrande’s problems started when China’s central bank, the PBOC, released the “three red lines” in August. They made it impossible for project developers to borrow money if they had too much debt. Old debts suddenly could no longer be paid off with new loans, and there was little money left to put into new projects.
The lack of liquidity has meanwhile affected the entire sector, also because real estate companies lent each other loans that they can no longer pay off. For example, Country Garden, one of the three major Chinese real estate companies, still has a claim on Fantasia of 105 million dollars. It also turned out to be irrecoverable on Monday. The share price of Country Garden in Hong Kong fell by 4.8 percent on Tuesday.
Project developer Sinic is also virtually broke: on October 18, the company has to pay off about 246 million dollars, but that will probably not work. Sinic is therefore as good as bankrupt.
Foreign investors
The question now is not only whether Evergrande will fall, but whether it will also drag the rest of the real estate sector along. And then the rest of the Chinese economy. And maybe the world economy too. Speculation abounds, but no one can say for sure. Not only because a hard, uncontrolled fall from Evergrande is far from certain, but also because the situation is incredibly complicated.
For example, there are both foreign and Chinese parties that have invested in the national real estate sector, resulting in domestic and foreign debt. It is clear that the foreign creditors are at the back of the queue if they want their money back, but that may not be very harmful. Their investments are also not so large that they easily fall over if they do not get anything back. In Evergrande’s case, it concerns $20 billion, out of a total debt of $300 billion.
More dangerous is loss of trust. Foreign investors may see China as an unreliable partner, as a country where you no longer know what rules the government will come up with next, and what effect that will have on your investments. Foreign parties may then become more hesitant with new investments.
Also read: Why does the Chinese Evergrande have such an impact on the international stock markets? And four other questions
Nobody knows how far the Chinese government really wants to go in cleaning up the sector. There has been a bubble for a long time. In a purely market-driven economy, this would probably have exploded sooner, but in the Chinese economy the government, or rather the Communist Party of China (CPC) plays a much larger role than in the vast majority of other countries.
Land prices
According to analysts, the real estate sector was actually ripe for correction in 2014 or 2015. After the economic crisis of 2008, China had pumped a lot of money into the economy, mainly to prevent it from being dragged into a global crisis. That worked, but it did mean that too much money was invested in infrastructure and real estate. Too much, because there was an oversupply of residential complexes, some of which were later demolished.
There are also problems surrounding the foundation of the real estate market: land prices. For a long time, local governments depended on the sale of land for a large part of their income. Real estate developers were happy to buy it up, for ever higher prices. They didn’t always do something about it right away. They speculated that the value would continue to increase, which it continued to do. Only now are many real estate companies struggling with large areas of land that are decreasing in value.
The companies have also borrowed a lot in informal circuits, through new financial constructions – think of small private investment funds, or loans from private individuals at high rates. That seemed useful. For example, the more risky debts did not end up with state banks. But those debts do exist, and it is precisely these debts that do not make the situation and possible restructuring any easier.
No free fall
Hong Kong economist Andy Xie states in a recent analysis that the Chinese government will probably again shy away from really thoroughly reorganizing the real estate sector. Even when other large Chinese companies, such as insurer Anbang and the conglomerate HNA, recently ran into problems, the government did not let them fall into free fall. Xie rather sees a partial and controlled restructuring in which the government plays a major role behind the scenes. Most other analysts still bet on that. It best protects the Chinese economy in the short term.
Xie does not think such an approach is healthy: it would be better to put real work into a new economic structure. It should be based much less on investment in infrastructure and much more on consumption growth. Such a pattern would better suit a more developed society where most of the infrastructure has already been completed, and avoid wasting money on infrastructure projects that are no longer really needed to further develop the country. The Chinese government has been wanting to go that way for a long time, but it hasn’t really succeeded yet.
This is partly due to the real estate sector. Because the prices there are so high, buyers are forced to put a large part of their budget into buying a house and paying off their mortgage. With lower real estate prices, more money could flow into consumer purchases.
The government may have supported insurer Anbang and conglomerate HNA, but Chinese President Xi Jinping has certainly not been a soft healer lately. He did not shy away from it, for example, by allowing large parts of the stock market value of companies such as Jack Ma’s Alibaba to evaporate. Who knows, he might even dare to undertake the thorough restructuring that Andy Xie would consider the most healthy for the Chinese economy.
Xi has two goals that he cannot achieve at the same time. He wants to stop housing and land speculation and make homes more accessible to the common man. If he succeeds in doing so, or if he at least seems to be putting in enough effort to do so, it helps justify his needing to stay in power any longer.
But its other goal is stability. If a cold restructuring leads to chaos and a weakening of economic growth, it is bad for stability. And he desperately needs it if he wants to manage at least another five years in office at the CPC Party Congress next year.
While Xi is keeping his cards tight for now, the real estate sector is crumbling a little further every day.
Fantasia, a smaller Chinese property developer, insisted two weeks ago that it would have no trouble paying off a $205 million bond. A reservation had already been made in the books, a Hong Kong bank had already pledged $142 million in financing.
However, when the amount for the repayment really had to be transferred on Monday, it remained silent. The loan was not paid off, and with that the formal bankruptcy of the company is very close. Trading in Fantasia shares on the Hong Kong Stock Exchange had already been halted on September 29.
Evergrande, one of China’s largest real estate companies, is not the only company in the sector to be in serious trouble. On June 30, this group had a debt of more than 300 billion dollars (260 billion euros), and so far it has not been able to reduce it substantially. This will only work if the company can sell real estate, but there is hardly anyone who wants to get into it now.
Evergrande’s problems started when China’s central bank, the PBOC, released the “three red lines” in August. They made it impossible for project developers to borrow money if they had too much debt. Old debts suddenly could no longer be paid off with new loans, and there was little money left to put into new projects.
The lack of liquidity has meanwhile affected the entire sector, also because real estate companies lent each other loans that they can no longer pay off. For example, Country Garden, one of the three major Chinese real estate companies, still has a claim on Fantasia of 105 million dollars. It also turned out to be irrecoverable on Monday. The share price of Country Garden in Hong Kong fell by 4.8 percent on Tuesday.
Project developer Sinic is also virtually broke: on October 18, the company has to pay off about 246 million dollars, but that will probably not work. Sinic is therefore as good as bankrupt.
Foreign investors
The question now is not only whether Evergrande will fall, but whether it will also drag the rest of the real estate sector along. And then the rest of the Chinese economy. And maybe the world economy too. Speculation abounds, but no one can say for sure. Not only because a hard, uncontrolled fall from Evergrande is far from certain, but also because the situation is incredibly complicated.
For example, there are both foreign and Chinese parties that have invested in the national real estate sector, resulting in domestic and foreign debt. It is clear that the foreign creditors are at the back of the queue if they want their money back, but that may not be very harmful. Their investments are also not so large that they easily fall over if they do not get anything back. In Evergrande’s case, it concerns $20 billion, out of a total debt of $300 billion.
More dangerous is loss of trust. Foreign investors may see China as an unreliable partner, as a country where you no longer know what rules the government will come up with next, and what effect that will have on your investments. Foreign parties may then become more hesitant with new investments.
Also read: Why does the Chinese Evergrande have such an impact on the international stock markets? And four other questions
Nobody knows how far the Chinese government really wants to go in cleaning up the sector. There has been a bubble for a long time. In a purely market-driven economy, this would probably have exploded sooner, but in the Chinese economy the government, or rather the Communist Party of China (CPC) plays a much larger role than in the vast majority of other countries.
Land prices
According to analysts, the real estate sector was actually ripe for correction in 2014 or 2015. After the economic crisis of 2008, China had pumped a lot of money into the economy, mainly to prevent it from being dragged into a global crisis. That worked, but it did mean that too much money was invested in infrastructure and real estate. Too much, because there was an oversupply of residential complexes, some of which were later demolished.
There are also problems surrounding the foundation of the real estate market: land prices. For a long time, local governments depended on the sale of land for a large part of their income. Real estate developers were happy to buy it up, for ever higher prices. They didn’t always do something about it right away. They speculated that the value would continue to increase, which it continued to do. Only now are many real estate companies struggling with large areas of land that are decreasing in value.
The companies have also borrowed a lot in informal circuits, through new financial constructions – think of small private investment funds, or loans from private individuals at high rates. That seemed useful. For example, the more risky debts did not end up with state banks. But those debts do exist, and it is precisely these debts that do not make the situation and possible restructuring any easier.
No free fall
Hong Kong economist Andy Xie states in a recent analysis that the Chinese government will probably again shy away from really thoroughly reorganizing the real estate sector. Even when other large Chinese companies, such as insurer Anbang and the conglomerate HNA, recently ran into problems, the government did not let them fall into free fall. Xie rather sees a partial and controlled restructuring in which the government plays a major role behind the scenes. Most other analysts still bet on that. It best protects the Chinese economy in the short term.
Xie does not think such an approach is healthy: it would be better to put real work into a new economic structure. It should be based much less on investment in infrastructure and much more on consumption growth. Such a pattern would better suit a more developed society where most of the infrastructure has already been completed, and avoid wasting money on infrastructure projects that are no longer really needed to further develop the country. The Chinese government has been wanting to go that way for a long time, but it hasn’t really succeeded yet.
This is partly due to the real estate sector. Because the prices there are so high, buyers are forced to put a large part of their budget into buying a house and paying off their mortgage. With lower real estate prices, more money could flow into consumer purchases.
The government may have supported insurer Anbang and conglomerate HNA, but Chinese President Xi Jinping has certainly not been a soft healer lately. He did not shy away from it, for example, by allowing large parts of the stock market value of companies such as Jack Ma’s Alibaba to evaporate. Who knows, he might even dare to undertake the thorough restructuring that Andy Xie would consider the most healthy for the Chinese economy.
Xi has two goals that he cannot achieve at the same time. He wants to stop housing and land speculation and make homes more accessible to the common man. If he succeeds in doing so, or if he at least seems to be putting in enough effort to do so, it helps justify his needing to stay in power any longer.
But its other goal is stability. If a cold restructuring leads to chaos and a weakening of economic growth, it is bad for stability. And he desperately needs it if he wants to manage at least another five years in office at the CPC Party Congress next year.
While Xi is keeping his cards tight for now, the real estate sector is crumbling a little further every day.