The Evergrande crisis –China Evergrande Group (HKG:6666) (OTCMKTS:EVGPF)– has brought to light how China has more than 30 million unsold properties that could serve as the home to 80 million people. Mark Williams, chief Asia economist at Capital Economics, estimates that the “ghost town” phenomenon in the country could account for the entire population of Germany.
Evergrande Crisis And “Ghost Town China”
As reported by CNN, a further 100 million properties are estimated to have been bought but not occupied, “which could accommodate roughly 260 million people, according to Capital Economics estimates.”
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The issue reflects key aspects of the Chinese real estate market and brings to light how key elements played a role.
According to Williams, 30% of China’s GDP is comprised of real estate and connected rubrics –a massive share– way higher than in other world economies in terms of output. This has been a key factor in the country’s rapid economic growth for several decades.
However, some experts voiced their concern in recent years about how this characteristic of China could yield a crisis, due to real estate developers taking huge debt to finance their projects.
Enter Evergrande, the country’s most indebted developer with more than $300 billion worth of liabilities, which has turned into a model of how growth can become untenable.
Christina Zhu, an economist at Moody's Analytics, says “Evergrande is not the only one struggling.” Potential defaults are looming over several other real estate developers that have run into cash flow problems and asked for more time to repay their debts.
Plunging Property Demand
According to a recent report by Zhu, 12 Chinese real estate companies defaulted on bond payments representing around $3 billion in the first six months of 2021.
“This accounted for near 20% of total corporate bond defaults in the first six months of the year, the highest across all sectors” in mainland China, Zhu added.
The economic rebound seen after the peak of the pandemic was short-lived for the construction sector, as the market is now showing signs of fatigue. According to Zhu, measures of price growth, housing [construction] starts, and sales have tailed off substantially in the last few months.
Property sales as measured by floor space sold dropped 18% in August compared to the same month in 2020, well before the Evergrande crisis. Mark Williams asserts in this regard: “Residential property demand in China is entering an era of sustained decline.”