Has China’s Property Sector Reached Its Tipping Point?

What Happened: The new year is spelling new troubles for the China Evergrande Group. On January 3, the world’s most indebted developer suspended trading in Hong Kong, pending an “announcement containing inside information.” This comes after the Chinese property giant defaulted on its debt — tallying up to $300 billion in liabilities — in December and missed new coupon payments worth $255 million last week, although these have a 30-day grace period. Local media also reported that Evergrande has been ordered to demolish 39 residential buildings in Hainan within 10 days due to its planning permits being obtained illegally.

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The Jing Take: This is not the first time Evergrande has halted trading. In October, the group suspended its shares ahead of “a major transaction,” thought to be about rival real estate firm Hopson Development Holdings’ plans to buy a 50 percent stake in its property services unit. However, that $2.6 billion deal fell through, and Evergrande shares shed 89 percent of their value last year.

The company’s latest woes do not rekindle confidence in China’s property industry, which is entering 2022 with at least $197 billion in maturing bonds, coupons, trust products, and deferred wages, according to Bloomberg estimates. Given the number of creditors Evergrande owes — including banks, suppliers, 1.6 million homebuyers, and its own employees — its potential downfall could send home prices tumbling and cause social unrest. Around 78 percent of urban Chinese wealth is tied up in residential property, and many angry buyers have been demonstrating outside Evergrande’s offices for months along with employees who were pressured to invest their savings in the company’s wealth management products.

As such, the focus going forward will likely be on stability. Last week, the embattled developer pledged to dole out $1,260 in monthly payments for three months to repay investors in its wealth management unit and resumed construction on 91.7 percent of its national projects (where this money is coming from is unclear). Meanwhile, China’s central bank has encouraged financial firms to support acquisitions in the real estate sector and pumped $188 billion into the economy by cutting the reserve ratio requirement for most banks.

But $300 billion is not chump change. With no bailout in sight, Evergrande will have to do a lot more to deliver on its commitments and prevent a wider crisis from slamming China’s already cooling economy.

The Jing Take reports on a piece of the leading news and presents our editorial team’s analysis of the key implications for the luxury industry. In the recurring column, we analyze everything from product drops and mergers to heated debate sprouting on Chinese social media.

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