Now Evergrande Has Collapsed, What’s Next For China’s Housing Market?

Evergrande, China’s most indebted property developer with around $300 billion in liabilities, missed a crucial repayment deadline this week. According to Fitch Ratings, the firm did not confirm payment of its latest debt obligation, triggering a default.

Meanwhile, recent events around Evergrande have convinced some analysts that China’s property bubble has been burst and that a crash has already started. 

Evergrande Misses Debt Deadline 

Major credit rating agency Fitch said on Thursday that it has contacted Evergrande about the missed debt payment but received no response. “We are therefore assuming they were not paid,” it said, declaring Evergrande in default.

However, other rating agencies like S&P Global Ratings and Moody’s have avoided putting the official “default” label on Evergrande. S&P Global Ratings have not made a statement about the debt payment as of Friday afternoon. However, the agency reported last week that “default looks inevitable for Evergrande.”

Alicia Garcia-Herrero, Natixis’ chief economist for Asia-Pacific, told CNBC that Evergrande’s default was expected, but no one dared to bring it out. “We should have been calling this a technical default for a long time already, but nobody dared,” she said, adding: 

“China is not making it clear because there’s no pressure to make it clear. Ratings [agencies] should be pushing. Some investors did push. Nobody wants to label this because they don’t want to bear the consequences. Everybody’s trying to increase what they can get out of it.”

Alicia added that rating agencies have avoided putting the official “default” label on Evergrande as it would allow the firm to restructure its debt at a lower cost. Meanwhile, Fitch has downgraded Evergrande’s rating to “restricted default,” meaning that the property developer has not yet filed for bankruptcy.

Evergrande was due to repay interest on about $1.2 billion on Monday but didn’t confirm that the payment had been transferred. On December 3, however, the company warned it could not guarantee it would be able to meet its financial obligations and planned to “actively engage with offshore creditors” about debt restructuring.

Chinese Markets Drop Amid Evergrande Fears

Chinese markets took a hit on Friday after Fitch declared Evergrande in default and downgraded its rating to “restricted default.” The move has spurred fears in China’s real-estate sector, which had a total market value of $52 trillion in 2019, twice the size of the US housing market, according to a report by The Wall Street Journal.

As of now, China’s CSI 300 Index, an index consisting of 300 A-share stocks listed on the Shanghai Stock Exchanges, is down by 0.46%. Evergrande’s stock dropped by as much as 3.9% on Friday morning but has since recovered some of the losses. The major property developer is now down by 1.67%.

The People’s Bank of China’s governor, Yi Gang, said on Wednesday that the Evergrande risks would not undermine other markets. He insisted that financial stress caused by Chinese property developers won’t cause longer-term damage to the Hong Kong market, adding that the rights of investors would be respected. 

Detailing on why Chinese markets have not suffered extended losses even after Evergrande missed the debt deadline, Logan Wright, a Hong Kong-based director at the consultancy firm Rhodium Group, said:

“I think a fair interpretation is that the markets were already pricing in a very high probability of default. The second is that the market environment has been changed to some extent by the easing of measures and state policy.”

However, it is worth noting that Kaisa, another indebted Chinese property developer, has halted trading shares at the Hong Kong stock exchange, as it is reportedly struggling to make a loan repayment of $400 million. According to a report by Reuters, Kaisa is unlikely to meet its $400 million debt payment deadline, which would trigger a technical default.

Fitch has also recently downgraded Kaisa. Last month, S&P Global Ratings warned that a default by Kaisa is inevitable as the company’s liquidity is so depleted. “We believe nonpayment risk is high and could ultimately lead to debt restructuring,” S&P said. “A default scenario is inevitable within the next six months.”

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Cathie Wood Compares Today’s China With Japan in 1989

Cathie Wood, CEO of Ark Invest, believes China’s real estate bubble in 2021 is analogous to that of Japan’s in the 1990s. For context, Japan witnessed an economic bubble from 1986 to 1991 in which real estate and stock market prices were largely inflated. When the bubble burst in early 1992, Japan’s economy stagnated — and has not recovered to the same highs nearly 30 years later. 

Wood argued that China’s real estate has been essential in propelling the country’s economy forward, as capital was being poured into the sector. According to some estimates, real estate accounted for roughly 75% of all consumer savings, as was the case in Japan back in the 1990s.

With demand for property so exceptionally high, Chinese property developers started to build apartments in highly undesirable places. In other words, developers have been investing Chinese consumer savings in building “ghost cities” that no one lives, and are reportedly not meant to be lived in. 

Meanwhile, Wood said that Beijing’s crackdown on big real estate developers and financial institutions lending to the real estate sector is”playing with fire.” She pointed out that commodities like iron ore and copper are getting cheaper, signaling that demand is falling in China and growth is stalling. 

Do you think Beijing will step in and find a way to ensure Evergrande’s core business survives? Let us know in the comments below.