Loss of confidence in China’s real estate sector could lead to contagion that would drag the Chinese economy further lower, analysts have warned.
The comments come after struggling developer China Evergrande Group failed to deliver a promised $300 billion restructuring plan over the weekend.
In filings with the Hong Kong Stock Exchange, Evergrande instead said it had “preliminary principles” for restructuring its offshore debt. It also said that one of its subsidiaries, Evergrande Group (Nanchang), was ordered to pay an undisclosed bail 7.3 billion yuan ($1.08 billion) for failing to meet its debt obligations.
“The priority for the government is to break the negative feedback loop characterized by the high debt ratio and liquidity crunch on the developer side,” Shuang Ding, Standard Chartered’s chief Greater China and North Asia economist, told CNBC’s Street sign of Asia.”
“It’s leading to a mortgage boycott and very low appetite on the part of the homebuyer, and that’s on the developer’s back because low sales are hurting their liquidity.”
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China is facing a revolt on mortgage repayments, with homeowners in 22 cities refusing to pay their loans on unfinished housing projects.
“So if this issue isn’t managed properly, it will have a profound impact on the economy, including government, bank and household balance sheets,” Ding said.
Ding said the troubles in China’s real estate sector are threatening a crucial foundation of a robust economy: market confidence.
Land sales, which account for a dominant part of the provincial government’s revenue, have fallen by 30% over the past year.
The economist said Beijing should isolate the problems in the real estate sector and tackle them holistically rather than with a piecemeal approach, with the aim of avoiding mass insolvencies.
Dan Wang, China’s chief economist at Hang Seng Bank, said the government can do this by making sure struggling companies have enough money to finish building semi-finished houses or complete a sold project.
China’s Politburo last week signaled the country could miss its 5.5% GDP growth target for the year, while new data showed China’s factory activity unexpectedly fell in July after relaxing from June’s Covid-19 lockdowns had recovered.
While Beijing is taking the crisis in the real estate sector seriously, the Evergrande crisis is unlikely to be resolved any time soon and may never be resolved, said Sandra Chow, co-head of Asia Pacific research at CreditSights.
“I think it will take a long time for investors to gain confidence not only in Evergrande but in the entire Chinese real estate sector,” Chow said.
“Despite all the easing measures, the real estate market in China is still in trouble and assets are still declining, especially in the lower regions. So it will be very difficult to rebuild trust.”
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