Too Big. May Still Fail
Bloomberg Businessweek|September 27, 2021
As developer Evergrande faces a debt crunch, China tries to depend less on real estate
Pat Regnier

Sunny Peninsula, a seaside development in the southern Chinese city of Guangzhou, was supposed to house 5,000 families in dozens of towers spread across an area the size of 30 soccer fields. Many of the buyers were white-collar workers benefiting from the fastest urbanization in human history.

But the project now looks more like the set of a disaster movie. Half-finished apartment blocks stand empty and abandoned. Untouched for months in the humid summer weather, piles of rebar and steel beams are accumulating coatings of rust.

China Evergrande Group, until recently the world’s largest property developer, owns dozens of stalled sites like Sunny Peninsula across China. Buckling under more than $300 billion in liabilities, the company is close to collapse, leaving 1.5 million buyers waiting for finished homes.

The global financial markets are bracing for potential aftershocks. Evergrande is China’s largest issuer of high-yield dollar-denominated bonds, and bills are coming due to an array of banks and suppliers. Given its footprint in the housing market, there’s also a risk of a disorderly collapse triggering a broader decline in property prices—bad news in an economy where 27% of loans are for real estate. The stress isn’t only being felt in bankers’ offices: Earlier this month homebuyers surrounded a government office in Guangzhou to demand construction be restarted on their apartments, and unconfirmed videos circulating on social media depict similar protests in other cities. Furious retail investors who helped fund Evergrande’s expansion have turned up at the company’s Shenzhen headquarters to complain about delayed repayments on wealth management products it sold.

Evergrande’s troubles are partly a familiar tale of an overextended, systemically important company taxing its creditors’ patience. That alone would make it a test for Chinese authorities. But its situation also reflects deliberate policy choices made by the ruling Communist Party under President Xi Jinping. Like the tech giants Alibaba Group Holding Ltd. and Tencent Holdings Ltd., which were the targets of sudden regulatory crackdowns that wiped out tens of billions of dollars in market value this summer, Evergrande found itself in the way of the party’s priorities. For several years, officials have been taking steps to cool real estate prices, which they see as a potential source of risk, and signaling that they expect both house price growth and new construction to remain roughly flat. “In the central government, the view has shifted over how much China’s economy can depend on the housing market,” says Zhu Ning, a former adviser to China’s central bank.

Instead, Beijing wants to steer China’s economic resources toward areas it views as more central to national security—above all, high-tech manufacturing that can help it reduce its reliance on the U.S. and its allies. The party is also emphasizing financial and social stability over sheer growth. Leaders speak of the goals of “moderate prosperity” and “common prosperity,” and households accumulating more debt to buy multiple or more luxurious homes doesn’t necessarily fit with that vision. Nor does the wealth inequality that property booms can create. Xi’s pledges to cut pollution and carbon emissions also require curbing construction.

China may be willing to let Evergrande fail if it thinks it can engineer a soft landing for the real estate sector. The $56 trillion domestic financial system is dominated by state-owned lenders, which give the government extensive power both to squeeze borrowers and to manage the impact of defaults. But the stakes are enormous. When industries such as construction and property services are included, real estate accounts for at least 15% of the nation’s gross domestic product, and more than 70% of urban China’s wealth is stored in housing. Countries such as Australia, Brazil, and Zambia depend on China’s relentless demand for steel, copper, and other construction materials. And U.S. and European companies increasingly look to its consumer market for growth.

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