Chinese checkers of realty, slowdown & technology

Two big Chinese realty conglomerates are teetering on the brink and attracting international attention. Country Garden, one of China’s biggest property developers, said it could default on its debt after it reported a record $6.7 billion loss for the first 6 months of the current calendar year.

A few days earlier, Evergrande, China’s largest property developer, reported losses of 33 billion yuan ($4.53 billion) for the first half of the year, versus a 66.4 billion yuan loss in the same period a year earlier. Evergrande’s shares fell 79% on Monday after resuming trading following a 17-month suspension, wiping out $2.2 billion of the company’s market value. The company shares have lost nearly 99% over the last
3 years.

Evergrande, promoted by Hui Ka Yan, China’s richest billionaire, followed a growth model based on unlimited borrowings and had ratcheted up debt of over $300 billion by 2020 when the COVID-19 pandemic broke. Worried that large debts of property developers would sink the Chinese economy, Premier Xi Jinping began a crackdown with new rules limiting the amount of money real estate firms could borrow.

The company has initiated desperate restructuring measures and has saved itself from complete rout, but it announced last month it had lost up to $80 billion over 2021 and 2022. Meanwhile, much like scenes in Gurugram, India, Evergrande offices have been invaded by small investors and home buyers who have not being given the homes they’ve paid for.

Real estate meltdown

And it is not just about Evergrande and Country Garden. China is going through its own ‘Lehman Brothers 2008 moment’when supply of houses outran demand and big borrowers defaulted on their mortgages. Reuters estimates companies accounting for 40% of Chinese home sales have defaulted since mid-2021, as thousands of homes have been left in a half-finished state. Millions who had invested in property-linked wealth funds, now face the prospect of losing all their investments.

Real estate in China till recently accounted for as much as one-third of the country’s entire wealth. Like India, common people invested money in property and valued their valued in terms of property holdings. It was an asset class that gave the maximum returns.

But good things and property booms don’t last forever. The pandemic and the consequent recession brought home the truth that China had overbuilt with runaway debt. Worse, the rebound of the markets seen in the West built on aggressive retail buying, is still not visible in China.

At the macro level, China’s promised post-Covid rebound seems to be sputtering even before it took off. Latest data points to China missing its modest 5% growth target for 2023. On a year-on-year basis, GDP expanded 6.3% in the calendar’s quarter, well below the forecast for growth of 7.3% and lower than India’s 7.8%. There is high employment too. Figures showed a record 21.3% of jobseekers between the ages of 16 and 25 were out of work. Exports declined the most in 3 years, and retail sales grew just 3.1%.