Last updated July 8, 2022
The property market in China has been experiencing a crisis due to regulatory curbs on borrowing. The Chinese government is cracking down on developers who take too much leverage.
The “three red lines” rule was put into place in 2020 to regulate the amount of debt that can be issued by these companies based upon metrics like debt-to-cash, equity and assets – making sure they don’t exceed certain limits so as not risk another economic crisis like 2008.
- Liabilities should not exceed 70% of assets
- Net debt shouldn’t exceed equity
- Cash must be at least equal to short-term borrowings
The new regulations have driven the country’s top selling developer Evergrande into bankruptcy.
The company was once considered as being flush with cash from their real estate investments, but this is no longer true after it emerged that they were one of China’s most indebted businesses with owed billions upon trillions for loans.
The question remains whether Evergrande’s debt crisis is worsening or if recovery is in sight.
Evergrande stock price
Evergrande shares slowly recovered after multiple announcements about its debt restructuring efforts. The company asked investors for additional time to work on their comprehensive and effective debt plan, and to not take legal action.
In addition to adding two new board members, the province of Guangdong is planning to release a framework for a debt restructuring plan by March. It’s expected to include a separation of offshore assets in order to sell them and pay international debt.
There are also signs emerging that Beijing is tightening control over the cash-strapped property group, which could mean bad news for investors.
Chinese property sector crisis
Evergrande is just one of the many Chinese developers who are struggling with their debt at the moment. The 2020–2022 Chinese property sector crisis impacts other major developers as well.
Country Garden – China’s largest developer
Country Garden’s share price dropped last week on fears that a reportedly failed fundraising effort may be an indication of fading confidence. The company had been one of the few remaining big, better-quality private developers largely unscathed by this year’s liquidity crunch.
Country Garden has experienced little impact from capital markets turmoil so far but there are signs it could change soon according to reports coming out recently about successful fundraising efforts being met with less than expected support.
After China Aoyuan Group announced recently that they won’t be able to make payments on certain dollar bonds, ratings agency Fitch Ratings downgraded the real estate developer to ‘Restricted Default’.
Aoyuan’s auditor, Deloitte, resigned over a dispute regarding audit fees. Similar to other Chinese developers, Aoyuan also started to sell major projects in foreign markets, such as the sale of properties in Canada for $169 Million to Anthem Properties.
China’s Property Market Domino effect
The majority of large property developers in China were downgraded, which might affect the country’s economic growth as the property industry and related sectors represent 25-30 of China’s gross domestic product.
Furthermore, land sales account for 40% of the revenue of local provincial governments, which could result in a massive drop in spending on public infrastructure.
Additionally, a typical urban Chinese household’s asset portfolio consists on average of 60% of properties, which could result in protests against the government’s measures and goal of stabilizing the country’s real estate market.