China’s real estate market is falter, Evergrande, one of the world’s largest property developers, filed for bankruptcy protection today in the United States bankruptcy court in the Southern District of New York. This dramatic turn follows more than two years after the company defaulted on its debt, a move that ignited a chain of defaults among smaller developers in China, highlighting the vulnerabilities in one of the nation’s most critical economic sectors.
Evergrande’s meltdown in 2021 marked the beginning of a slow decay in China’s real estate industry, which now threatens the broader Chinese economy. Another giant in the sector, Country Garden, is on the brink of default, having missed payments to lenders and holding a staggering $200 billion in unpaid bills.
Despite the bankruptcy filing in the U.S., where Evergrande, along with its affiliates, has significant assets, the company remains in negotiations with its creditors in Hong Kong and the British Virgin Islands. In a recent statement, Evergrande noted that it is “pushing forward its offshore debt restructuring as planned” and is actively seeking the U.S. court’s approval. This drawn-out negotiation process is emblematic of the slow-moving crash engulfing China’s real estate market.
The real estate sector, long a key avenue for millions of Chinese people to accrue wealth, has effectively ground to a halt. A few years ago, the government, led by President Xi Jinping, launched initiatives to cool the soaring property market. In line with Xi’s policy that “houses are for living, not for speculation,” the government in 2020 clamped down on excessive borrowing, thereby constricting real estate companies’ ability to raise funds, which set off a series of defaults.
This policy shift marked a significant reversal for a housing market that, for decades, thrived alongside China’s ascension as a global economic powerhouse, despite being tainted by overbuilding and risky financial practices.
Consumers have not been insulated from this crisis. Prospective homeowners frequently secured mortgages to buy apartments before their construction was finalized, thereby furnishing developers with a consistent revenue stream to finance further projects. With the market’s downturn, these individuals are now saddled with debt and often, no home to show for it.
According to Gavekal Dragonomics, a research firm, Evergrande had presold 720,000 apartments that remained incomplete at the end of last year. Meanwhile, Country Garden is estimated to have nearly one million unfinished apartments across hundreds of cities in China.
The collapse of Evergrande and the perilous state of other major developers are unfolding as China’s overall economy, the world’s second-largest, grapples with its own set of challenges. After three years of stringent “zero Covid” policies, companies are hesitant to hire, consumers are reluctant to spend, stocks are underperforming, and potential homeowners are increasingly wary of investing in property.
“China’s property sector has experienced an unprecedented correction,” analysts at Nomura noted in a recent research publication.
On Chinese social media platforms, the public response to Country Garden’s financial woes has been fierce, with some users evoking the painful memory of Evergrande’s default two years prior. The anger is palpable, reflecting widespread frustration with the crumbling property sector and the government’s inability to stabilize it.
The bankruptcy filing of Evergrande, a once-mighty giant in China’s real estate scene, is a stark and unsettling symbol of a broader systemic issue. As the property sector continues its precipitous decline, the ramifications for China’s economy and its people are likely to be profound and enduring. The situation warrants close global attention, as the ripple effects of this crisis could reverberate well beyond China’s borders.
This is a developing story and will be updated as more information becomes available.