China's Property Market Death Spiral

Newsweek

18 hours ago

Based on facts, either observed and verified firsthand by the reporter, or reported and verified from knowledgeable sources.
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Chinese property giant Evergrande, the developer whose fall triggered a crisis in the country's property sector, said on Tuesday that it will delist from the Hong Kong stock exchange later this month.
The announcement was another nail in the coffin of China's once-thriving property sector, which turbocharged the economic growth of the country over the past few decades.
"Delisting means no recovery of the sector," Zhaopeng Xing, senior China strategist at ANZ Bank, told Newsweek. If anything, things will continue to go downhill for China's property sector, he said.
Whatever Happened to Evergrande?
Evergrande was once the biggest builder in the world's second-largest economy, China. Then it became the most indebted real estate developer in the world.
The company rode the wave of China's property sector's rapid expansion over the past few decades, accumulating excessive levels of debt that eventually became problematic when the country's regulators implemented changes to limit developers' borrowing.
After a few bad years, Evergrande defaulted on its debt in 2021, causing a domino effect in the country's entire property sector. The company has actually become a bit of a symbol for the crisis in China's property sector, which is facing drastically slower growth.
"There have been at least several dozen similar cases in which construction companies can no longer continue to run business," Kent Deng, professor of economic history at the London School of Economics (LSE), told Newsweek. "A common symptom is that such companies purchased land leases at distorted high prices from the government but were unable to pass the cost onto home buyers."
"China's real estate woes are entirely self-inflicted," David Lubin, the Michael Klein senior research fellow in the Global Economy and Finance Programme at the Chatham House think tank, told Newsweek.
Photo-illustration by Newsweek/Associated Press/Canva
"Starting in 2020, Chinese authorities began an effort to wean the economy off its intense reliance on real estate investment," he said. "This was partly for prudential reasons, since the economy's dependence on real estate investment had become almost an absurdity: Real estate investment was a bit below 15 percent of Chinese GDP in 2020, suggesting a highly imbalanced economy—too many eggs were in the property basket."
But another reason for the authorities' clampdown on real estate, Lubin said, was more strategic.
"By weaning the economy off its dependence on property, that could free up capital and credit resources to move to areas of the economy—high-tech manufacturing, in particular—that had grown in importance as far as the authorities were concerned," he said.
A couple of years ago, Evergrande still thought it could bounce back. But a $23 billion debt restructuring plan fell apart in 2023 after an investigation was launched into the company's CEO, Hui Ka Ya, once the second-richest man in Asia.
In January 2024, Evergrande was handed a liquidation order after a court ruled that it had been unable to come up with a realistic restructuring plan for its debts, which at the time amounted to more than $300 billion.
"We are talking about a business network which has been deeply involved in land deals with corrupt officials at all levels and huge real estate speculations in all major cities in China. It was asked to stop trading in 2024," Deng said.
On August 8, Evergrande received a letter from the Hong Kong stock exchange saying they would be delisted as it had failed to resume trading by July 28.
What Does This Mean for China's Property Sector—And for China's Economy?
"Evergrande's demise was set in stone a while ago, so the delisting is just a formal confirmation of what we already knew. But recent data suggest the sector still hasn't reached a bottom unfortunately," Benjamin Bennett, Asia-Pacific investment strategist at Legal And General Investment Management, told Newsweek. "House prices continue to fall and sales are still very weak. So I think there's more pain to come for developers."
Evergrande's delisting "confirms that the good days of the Chinese property market are finally over," Deng said.
"In the past three decades the supply side has over-expanded far too much. In one account, there are 600 million permanent buildings in Mainland China, or one building for every two Chinese. There is no possibility for the domestic consumers to absorb this over-supply," he explained.
There are, at this point, many more homes in the Chinese market than demand can absorb.
"There are plenty of houses in the market on the one hand, and low marriage rates and low birthrates on the other make low cost renting available everywhere," Deng said. "So, the demand for newly built properties has been stagnant for at least 10 years now."
Essentially, the construction boom that boosted the Chinese property sector and the country's entire economy seems solidly a thing of the past, never to be repeated—at least not anytime soon. Home sales have fallen drastically since the COVID-19 pandemic, and, in August 2024, China reported its biggest annual decline in property values in nine years.
The unstoppable downfall of the country's property sector, with little chance of recovery, could continue to have an impact on the Chinese economy, which has for so long relied on it for growth.
"Selling lease-holding land plots has been an easy way to raise government revenues and then pass the costs onto ordinary consumers who will then pay everything back in the next 30 years," Deng said.
"This is a long-term scheme for both parties. China will face the consequences in the next generation's time."
Can China's Property Sector Downfall Be Stopped?
According to Lubin, there are "mild signs of stabilization" in China's real estate market, even though they do not represent a significant shift.
"The official 'real estate climate index' troughed in May 2024 and has been rising modestly since then, but nothing to write home about, and real estate price inflation is still negative," he said.
"The sector remains under a lot of pressure, therefore, and there's something of a vicious circle at work: Real estate is weak because household confidence is weak because real estate is weak," Lubin said.
"That kind of circle can only be broken by policy intervention, but for now it seems that the authorities remain deeply unwilling to deliver anything like a 'bazooka' to lift household confidence."
The Chinese government said it is determined to make new efforts to stabilize the property sector's decline soon. But experts are skeptical of how big their impact could be, whatever they decide to do.
"One should not overestimate the ability of the Chinese state in stabilizing China's property market's downturn, simply because the government is unable to buy up all the unsold properties and bail out all the mortgage breaches," Deng said.
The bottom line, according to Deng, is that "buildings cannot be physically exported from one country to another and thus have to be dealt with by the domestic population," he said.
"My own estimation is that it will take China 30-40 years to get back to its feet," he said. "A great many investors will go broke."
Xing agrees with this gloomy vision for China's property sector's future.
"China urbanization is slowing and is now close to 70 percent," he said. "The room for builders is getting limited. I do not expect any strong policy support for property development going forward. Policy priority changes to urban renewal."
Xing and his team estimate that new home sales in the country will decline by another 30 percent in the next few years.