Understanding the China Property Developer Crisis

China’s second largest property developer, Evergrande, is in big trouble and that caused global stocks and crypto to crash today.

Here is a video by Asianometry which goes over how Evergrande grew quickly from 1996 to 2021.

They used a lot of debt and leverage. They have US$300 billion in debt.

They have development projects in over 170 cities in China. Evergrande Group owns 45.8 million square meters of development land and real estate projects in 22 cities.

Chinese regulators created Three redlines at the start of 2021 which required less debt for real estate.

* The policies forced deleveraging to improve financial health for the real estate sector;
* The government is moving to address debt build-up in the sector and we have high confidence in the scope of these policies;
* Future access to financing will be predicated on developers’ adherence to strict criteria including liability to asset ratio (excluding advance receipts) of less than 70%, net gearing ratio of less than 100%, and cash to short-term debt ratios of more than 1x.

The Chinese government forced and is forcing Evergrande and other property developers to get less debt but Evergrande was too indebted and could not adjust.

Asianometry believes that Evergrande will be broken up but the Chinese government will protect the (mostly state) banks holding the debt.

Evergrande is a poster child for excessive debt and excessive risk and they are being imploded as planned by the Chinese Government. They have assets that will be dispersed as the company is crushed. There could be a few more property developers that will also be collapsed.

Differences for China versus the US in 2008.
* China can take all of the assets of these companies and send them to banks or others
* China protects the state banks and others who hold the debt

But what about the firesale of real estate does that crush real estate prices? If too much supply becomes a problem, China can physically bulldoze or implode as many extra buildings as they need to get back into balance. China can rebuild and build anew in a few years when there is demand.

SOURCES -Wikipedia, Asianometry, UBS
Written by Brian Wang, Nextbigfuture.com