China’s Economy Slowed Late Last Year on Real Estate Troubles
As real estate companies try to conserve cash, they are starting fewer construction projects. And that has been a big problem for the economy. The price of steel reinforcing bars for the concrete in apartment towers, for example, dropped by a quarter in October and November before stabilizing at a much lower level in December.
The decline in home prices in smaller cities has hurt the value of people’s assets, which in turn made them less willing to spend. Even in Shanghai and Beijing, apartment prices are no longer surging.
Understand the Evergrande Crisis
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How much does it owe? Evergrande has more than $300 billion in financial obligations, hundreds of unfinished residential buildings and angry suppliers who have shut down construction sites. Things got so bad that the company paid its overdue bills with unfinished properties and asked employees to lend it money.
How did the company get into financial trouble? For decades, China’s real estate market operated unrestrained. But recently, Beijing started taking measures, including new restrictions on home sales, to tame the sector. Evergrande borrowed heavily as it grew and expanded into new businesses, and eventually ended up with more debt than it could pay off.
How has the Chinese government addressed the crisis? Beijing sat on the sidelines for months as Evergrande neared financial collapse. It wasn’t until December that the company said officials from state-backed institutions had joined a risk committee to help restructure the business.
Where do things stand with Evergrande now? For months, the real estate giant averted default by making 11th-hour payments on its bonds. But on Dec. 9, a major credit ratings firm declared Evergrande in default after it failed to meet a payment deadline. What is next for the company, bankruptcy, a fire sale or business as usual, has yet to be determined.
There have been faint hints of renewed government support for the real estate sector in recent weeks, but no sign of a return to lavish lending by state-controlled banks.
The financial distress of Evergrande “is a signal that money will be pushed from real estate to the stock market,” said Hu Jinghui, an economist who is the former chairman of the China Alliance of Real Estate Agencies, a national trade group. “The policies can be loosened, but there can be no return to the past.”
Local Governments Feel the Pinch
The slowdown in the housing market has also hurt local governments, which rely on land sales as a key source of revenue.
The International Monetary Fund estimates that government land sales each year have been raising money equal to 7 percent of the country’s annual economic output. But in recent months, developers have curtailed land purchases.
Starved of revenue, some local governments have halted hiring and cut bonuses and benefits for civil servants, prompting widespread complaints on social media.
Article source: https://www.nytimes.com/2022/01/16/business/economy/china-economy.html