China’s Realty Check

How bad is the crisis in China’s realty sector? The short answer: pretty bad. 

Following the default of Evergrande, China’s real estate giant, Country Garden Holdings, the nation’s largest developer, is facing unpaid debts and undelivered apartments. Sales are down 81 per cent year-on-year. Images of Chinese authorities demolishing empty apartment blocks in mid-tier cities have gone viral. 

In a stock exchange filing last month, Country Garden warned that it will not be able to “meet all its future offshore payment obligations, including dollar bonds.” 

Country Garden’s size makes it a crucial cog in China’s realty sector which accounts for 30 per cent of China’s GDP. It employs 70,000 people and has over 3,000 housing projects under development in cities across China. The company is one of the world’s most indebted real estate firms with total liabilities of $187 billion. 

As Bloomberg reported: “Country Garden’s warning came after it managed to dodge its first public bond payment failure and succeeded in rescheduling local debt in recent months, shifting investors’ focus from increasingly inevitable delinquencies towards a likely massive debt overhaul. With its peer Evergrande Group facing rising risk of liquidation amid uncertainties about its own restructuring, the developer’s deepening woes underscore the need for Beijing to adopt stronger measures to support a key growth engine as homes sales keep slumping. 

“Country Garden’s latest statement ‘may pressure the offshore bondholders to approve any upcoming restructuring proposal,’ said Ting Meng, a senior credit strategist at Australia & New Zealand Banking Group. ‘The company is clearly still in a liquidity crunch with many unfinished projects to complete and limited access to new financing’.”  

The Chinese government has been inconsistent in tackling crises. Its Covid lockdown strategy hurt the economy before it was abruptly reversed in November 2022. The damage though had been done. Beijing’s new law criminalising sharing of data by foreign companies operating in China has accelerated the flight of Western firms. Expatriate executives face jail terms for violations of the new law. 

The deepening ties between Russian President Vladimir Putin and Chinese President Xi Jinping has made the United States double down on sanctions against the export of high-tech chips to China. Washington wants to slow advances in China’s semiconductor industry. Chips are vital for applications in artificial intelligence (AI) which power technologies in key industries: electric vehicles, space, automation, deep machine learning and quantum computing. 

The danger for China is that the crisis in the real estate sector will have a spin-off impact on the broader economy. Foreign direct investment (FDI) in China in the April-June 2023 quarter fell by 87 per cent to $4.9 billion. 

The government has meanwhile belatedly offered sops to realty firms. Mortgages can now be rolled over at lower interest rates to bring buyers back. Municipalities with large debt liabilities are being given more time to pay back their debt by rolling over loans – a practice in vogue in India a decade ago during the “phone banking” era which led to an explosion of non-performing assets (NPAs). It took the last nine years to repair the balance sheets of Indian banks. By kicking the debt can down the road through rolling over debt, China could be catching a bad habit India has abandoned. 

*Green Shoots?

Amidst the gloom, there are signs of green shoots. The Chinese economy grew by 1.3 per cent quarter-on-quarter in July-September 2023, compared to sluggish q-on-q growth of 0.8 per cent in April-June 2023. 

But as always, politics weighs heavily on the Chinese economy. After the disappearance and sacking of China’s foreign minister Qin Gang and defence minister Li Shangfu, the copper tycoon He Jinbi, founder of Maike Metals International, China’s largest importer of refined copper, went missing on October 10, 2023. 

Maike Metals had run into a severe liquidity crisis last year. He Jinbi joins a retinue of business and political leaders who vanish from public view when they run foul of the Communist Party of China (CPC).  

Xi Jinping meanwhile hosted a high-profile forum of his legacy project, Belt and Road Initiative (BRI), on October 17-18 in Beijing. Over 130 country delegations attended though spirits were muted by the Israel-Hamas conflict. The heavy debt most BRI projects are saddled with too has caused consternation among the BRI faithful. 

The only European Union (EU) member present at the BRI conference was Hungary which has backed the Russian invasion of Ukraine. The presence in Beijing of Vladimir Putin, who held a marathon three-hour meeting with Xi, has added to the anxiety in Western capitals over the expanding China-Russia axis. 

The relationship between Europe and China has soured since the Russia-Ukraine war. The BRI was meant to be a new Silk Route from Asia to Europe. That vision has blurred. 

Annual trade between the EU and China is over $900 billion. Decoupling is not an option. But de-risking is. French President Emmanuel Macron has said he wants to cultivate deeper trade ties with other countries, including India. The EU doesn’t want a trade war that the United States is waging against China. But the old EU-China bromance has run its course. 

China’s bid to acquire a bigger profile in the Middle East has meanwhile met with its own reality check. Before the Israel-Hamas war broke out, Beijing had positioned itself as a peacemaker in the Middle East. Xi met the Palestinian Authority (PA) President Mahmoud Abbas in Beijing earlier this year. He hosted a joint meeting between the foreign ministers of Sunni Saudi Arabia and Shia Iran in the Chinese capital.

But following the Israel-Hamas conflict, it has become clear that the only country which still calls the shots in the Middle East is the US.