Photo by Colliers
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Chinese real estate developer Evergrande filed a petition for bankruptcy protection under chapter 15 of the U.S Bankruptcy code in New York City earlier this August. The Evergrande Group, once China’s largest real estate developer, has lost more than 99 percent of its capitalization since its all-time high in 2020, and the company’s financial health is often used as a marker to track the state of China’s now-declining housing market. While many have drawn parallels to the 2008 financial crisis that affected the American housing market, it is critical to examine the economic crisis in China in the context of its housing market and economy.
First and foremost, the Chinese housing market is the largest asset class in the country, with over 70 percent of household wealth allocated to it. It has long been considered the world’s largest asset class, nearly doubling the size of the U.S. stock market in 2017. The demand for housing has been driven by speculation instead of intrinsic demand, as housing prices in Shenzhen have become over 43.5 times the median household income. In addition, much of the available housing in smaller cities has remained vacant, resulting in certain districts in China being dubbed “ghost cities”. Thus, experts concluded that the demand for housing before the crisis was no longer tied to supply, but instead due to speculation, specifically the movement towards cities due to industrialization.
Ragoff, Yang (2020). Source.
Ragoff, Yang (2020). Source.
Ragoff, Yang (2020). Source.
Large property developers such as Evergrande eventually capitalized on this market. In its initial public offering (IPO), it raised only 772 million USD in 1996. By its peak, its market capitalization was worth over 50 billion dollars in March of 2017. Evergrande, alongside other real estate developers, could only do this by incurring copious amounts of debt to fuel its rapid development. As of 2023, Evergrande still owes more than 300 Billion USD in debt, even after making repayments on their loans.
While many experts dispute when the real estate crisis began in China, its pervasiveness and economic impact are widespread and indisputable. Economists cite the introduction of the Three Red Lines policy, a series of policies implemented by the Chinese government to curtail the amount of debt subsumed by developers. Chinese developers who had taken in a significant amount of debt were forced to liquidate and pay them off in a relatively short period. Facing the risk of insolvency, Evergrande began to sell off its assets and holdings at a significant discount. Eventually, housing prices crashed as various developers had to compete with Evergrande’s discounts.
The rapid decline in housing prices devalued various assets held by financial institutions. Chinese land sales, which provide up to 40 percent of the government’s revenue, were also threatened due to the decline. As Evergrande began to show signs of weakness, the stock started rapidly depreciating in value.
Throughout 2021, the firm could not make various payments to foreign and domestic investors. While this occurred, Fitch, a trusted credit rating agency, decreased its credit rating until December 2021, when it was declared defaulted. Eventually, on March 21, 2022, the company suspended trading its stock on the Hong Kong Stock Exchange. The company then spent the next 17 months outside the public market, only returning to avoid delisting from the exchange, which occurs 18 months after a suspension.
The average Chinese citizen is now feeling the effects of the crisis as the housing market slows. The market once fueled the need for cement, metal, and other industrial materials. As it shrank, millions of jobs were lost as construction halted. In addition, The decrease in housing prices has drastically reduced the wealth of households and decreased consumer prices for the first time following the pandemic. Following the arrest of Evergrande’s founder, the world desperately awaits how this will affect broader global markets.
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This article was edited by Danielle Barber.
