Will Evergrande debt bomb burst China’s housing bubble?

One of the largest debt-laden realtors in the world, Chinese property giant Evergrande is saddled with a debt of nearly US$310 billion, which is 2.1% of the Chinese economy. The Evergrande debt crisis is no less than a ticking time bomb, which is likely to spell an obvious doom on the world’s second largest economy.

As Beijing has decided to crack down on the sector that has been primarily banking on debt for over past 20 years, it may have consequences that will transcend the sectors, and even geographical boundaries.

Analysts are of the opinion that the Evergrande fallout could lead to the bursting of a bubble that has been building for more than two decades. Evergrande, at the group level, has overwhelming liabilities and wild diversification. This would mean that instead of growing in a planned manner, the company has sprawled in the past 20 years owing to the easy access to the debt.

Other than Evergrande, there have been at least two bond defaults from major Chinese developers this year, with others scrambling to raise cash to drive the merry-go-round of debt, land buying and off-plan sales that move China's property market. This would lead to the firesale of property by the Evergrande and other competing developers – ultimately causing a collapse in the prices of homes in China.

A slowing population has also hit property demand – which would in turn impact the pricing of the new homes being developed in the world’s most populous country.

If this sharp fall in prices take place, it would make the balance sheet strength of the developers redundant. Even those with healthier balance sheets will find it hard to finance construction. The credit lines would evaporate. The rentals would crash as well, and then we could have a situation like we had in the 2008 Global Financial Crisis.

And probably, China’s all powerful communist government is aware of this. After cracking down on the sector to clean up piling debt, the government seems to be offering its hand to shore up the sector. The possible bailout – howsoever fragmented it is – is being talked about Evergrande. The Chinese central bank, which is under the firm grip of the ruling communist party, is also pushing liquidity into the system in an unprecedented way – with open market operations worth CNY660 billion (US$100 billion) conducted in just a week’s time.

Bottom line:

The clock is ticking for China. An economic blow-up for China after COVID-19 would seriously dent the country’s foreign relations – probably forever. It is time for China to get its act together.

(The opinions expressed in this article are those of the author only, and do not reflect the opinions or views of Kalkine Media or its related entities.)

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