Analysts cautioned that the decline in confidence in China’s real estate market could start a chain reaction that would further harm the country’s economy.
The remarks follow China Evergrande Group’s weekend failure to execute the $300 billion restructuring plan it had promised, which has put the developer in hot water.
Evergrande, on the other hand, claimed in documents filed with the Hong Kong Stock Exchange that it has “preliminary concepts in place” for the restructuring of its offshore loans. Additionally, it disclosed that one of its subsidiaries, Evergrande Group (Nanchang), had been compelled to pay an unidentified guarantor 7.3 billion yuan ($1.08 billion) for breaching its loan obligations.
“For the government, the priority is to break the negative feedback loop that features the high leverage ratio and the liquidity crunch on the part of the developers,” according to Shuang Ding, head economist for Greater China and North Asia at Standard Chartered.
“That leads to a mortgage boycott and very low appetite on the part of the homebuyer, and that goes back to the developer because low sales affect its liquidity.”
Homes in 22 cities across China are refusing to be repaid for loans for unfinished housing projects, causing a mortgage repayment revolt.
“So if this problem is not handled properly, it will have a profound impact on the economy, including the government balance sheet, the banks’ balance sheet as well, and households,” Ding said.
According to Ding, the issues in China’s real estate market pose a threat to market confidence, which is a vital component of a strong economy.
The majority of the provincial government’s revenue comes from land sales, which have decreased 30% in the last year.
To prevent widespread insolvencies, the economist advised Beijing to ringfence the problems in the real estate market and address them comprehensively rather than piecemeal.
The government may achieve this, according to Dan Wang, chief economist for China at Hang Seng Bank, by ensuring that the struggling businesses have enough cash on hand to finish projects that have already been sold or to finish residences that are partially constructed.
The Chinese Politburo warned last week that the nation would fall short of its 5.5 percent GDP growth goal for the year, and recent statistics revealed that manufacturing activity in China unexpectedly declined in July after recovering from Covid-19 lockdowns in June.
The Evergrande situation is unlikely to be resolved anytime soon and may never be resolved at all, according to Sandra Chow, co-head of Asia-Pacific research at CreditSights, even if Beijing is treating the real estate sector crisis seriously.
“I think it’s going to take a long time for investors to get confidence not just in Evergrande, but in the China property sector as a whole,” Chow said.
“China’s property market is in difficulty, still, despite all the easing measures and asset values are still falling, especially in the lower tier regions as well. So it’s going to be very difficult to rebuild confidence.”