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An Asian Achilles Heel for the Well-being of the region

As parts of the world have come out of the grip of the pandemic, life appears to be returning to some level of normality as we have entered the second quarter of 2022. Asia in particular, however, may well be looking at a new economic slump due to new coronavirus outbreaks as well as the ongoing conflict taking place in Ukraine. This may also be exacerbated further by the increasing issues arising in the powerhouse of Asia – China – and perhaps the potential risks emerging in its real estate market.


Slumps


On Monday 4th April, the World Bank stated that the war in Ukraine was threatening the volatile recovery of the East Asia and Pacific region’s (EAP) developing countries from the shock of the global pandemic. The war has arrived hot on the heels of the spread of the COVID-19 virus globally, the tightening economy of the US, and the resurgence of coronavirus in the key state of China itself. Sanctions being imposed on Russia as well as the war-torn disruptions to commodity flows are imposing financial stress, and obstructing wider global financial growth.


Speaking of growth, estimates of it by the bank have been sliced from 5.4% in 2022 to 5%, and may well slump as far as 4%. Should this happen, it is anticipated it will add as many as six million people to the poverty trap.


Of concern is the world’s second-largest economy – China – where slowing industrial outputs and an estimated 5% growth forecast (down from 8.1% last year and now below the official target of 5.5%) suggest the financial titan may be looking at the beginnings of a recession. With the decline in industrial output comes the inevitable decline in the trade of those outputs and with that, an impact on the finance. When finance is affected, issues can spread to the wider economic community.


Bubbles and Houses


It has long been touted that China and the Chinese economic growth is a star on the rise. A big factor in that rise has been the Chinese real estate bubble. Essentially, the bubble was in existence from around 2005 to around 2011, and in that time, China saw the value of houses in the country triple – a boom that was driven by both government policies as well as changes in cultural attitudes.


As reported by the New York Times back in 2012 the bubble ‘popped’ and markets that became immediately depressed were steel and cement, perhaps somewhat predictably. House prices began to fall amidst middle-class incomes appearing unable to afford houses in larger or more developed areas.


Real estate experts in 2011 predicted there were approximately 64 million empty properties and apartments in China, and that at that time, the housing development market in the country was grossly oversupplied and overvalued.


Experts then were concerned about the considerable potential impact this would have on the future. By late 2014, the International Monetary Fund (IMF) was warning that the oversupply issue in the Chinese real estate market was threatening to have detrimental effects on the country’s economic welfare (as reported by Forbes).


By 2016 the Chinese government had implemented a number of measures to mitigate the problem including lowering taxes on the sale of homes, putting a limit on the sale of land for new development projects, and setting out plans for mortgage down payment reductions.


The Now


Much like many other developed countries worldwide, China’s housing market has become one of its most prized assets. It has become fundamental to the economic Chinese growth model. Should it crash, China, the EAP region, and even the globe will bear the brunt.


In December 2021, Evergrande – one of China’s largest property developers – was officially declared to be in default, and it has failed to declare its final results in time for the end of March deadline due to extensive restructuring. As time has gone on, concerns have grown about the true extent of the company’s debt.


Since November 2021 other developers have exhibited signs of distress and have defaulted, raising the question of how profound the problem actually might be.



Figure 1: Accruing Debt by Chinese Real Estate Businesses in 2022 (Geopolitical Futures)


Figure 1 shows how much debt has been achieved by real estate businesses in China in 2022. Kaisa Group Holdings, Guangzhou Yuexiu Holding Ltd, and Yunnan Health and Cultural Tourism Holding Group Co Ltd, all show an accrued debt of over $2 billion each with Kaisa Group itself approaching the near $3 billion mark.


Taken together, the above 10 businesses have accrued a debt of somewhere around $19 billion. It is no wonder there are growing concerns for the industry. Toward the end of March, CNA reported – as well as many other sites – that Kaisa Group would not be able to publish its audited earnings and placed the reason for it squarely at the feet of lockdown measures put in place to combat coronavirus spiking.


Kaisa Group is the second-largest dollar bond issuing entity among Chinese property developers after Evergrande and was reported to be restructuring its $12 billion foreign debt after it had defaulted on a number of bonds last year. Observing more broadly, the Business Times recently reported that for the third quarter in a row, China’s real estate sector contracted, and is dragging on the country’s economy.


The Now, Now


Just in the last week Chinese real estate services provider E-House Enterprise Holdings Ltd has defaulted on a $298 million US dollar bond which came up in an exchange filing and was reported on by Caixin Global. The services provider appears to have got itself caught up in the financial woes of a number of property developers.


Last year, what the company reported was a net loss of $1.4 million, this new development adds extra misery. It might not be all doom and gloom, however. There are some signs that the confidence of investors in the real estate market has seen a boost by the support being promised by the Chinese government and its loosening of some policies. More recently, bond trading and prices have risen possibly as a result.


The ongoing boom of the market might well be a thing of the past, however, S&P Global Ratings stated in early April (and reported on by the Verve Times) that the measures taken by the government to ease the distress in the sector will take several quarters to take effect, and that when the market emerges from the apparent correction taking place, it may not be the same, with such consistently high growth no longer a feature.


In any case, China’s real estate market, for the time being, remains a staple of the Chinese economy and is fundamental to the financial wellbeing of the country. If it were to suffer a severe correction or even a collapse, it will have meaningful consequences for that region of the globe, especially for those countries and markets still immature and developing. The robustness of real estate development in China persists as an Achilles heel for the well-being of the region as a whole.

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