Is Evergrande too big to fail?
Written and accurate as at: Oct 01, 2021 Current Stats & Facts
The Chinese Communist Party has dramatically changed its economic focus over the past few decades. Establishing itself as the manufacturer to the world then progressively shifting more reliance on its domestic economy to the current ideology of "common prosperity" or shared wealth. And as with most things in China, this socialist ideological transition is happening at warp speed.
Recently, China has banned work drinks, cryptocurrency, tutoring, reality television, gaming above three hours a week, ride-sharing apps and boy bands. Boy bands. The horror. Having control of the narrative is serious stuff.
However, it seems these pastimes are much easier to change than others, including real estate investing. Consistent with the CCP push towards shared prosperity and applied socialism, affordable housing has been a fundamental goal of the CCP.
China has an unrivalled insatiable demand for real estate, pushing prices in megacities like Beijing, Shanghai and Guangzhou amongst the most expensive in the world. The ripple effect was ensuing speculation in more affordable markets fueling pricing bubbles all over China, primarily funded by overleveraged finance. The reality that over 20% of Chinese homes being vacant best provides perspective on the scale of activity.
Aiming to make real estate more affordable for the average Chinese family, the CCP recently intervened by placing a borrowing limit known as the 'Three Red Lines'.
China's second-largest property developer, independently owned Evergrande, rode this boom like a champion jockey. They borrowed around $400 billion to develop over 1300 projects across 280 Chinese cities. The 'Three Red Lines' policy intervention has seen property prices fall over 25%, effectively bankrupting Evergrande.
While many think the Evergrande housing crisis is part of the government's general squeeze on the Chinese elite, which has until now been limited to internet giants. The reality is that any significant slowdown in China's real-estate sector could easily cut as much as 10% from short term GDP growth.
The question remains, will the CCP make an exception and bail out the 'wealthy elite' given China's economic dependence on the real estate sector, or resist comprising their socialist doctrine, as with boy bands, hooking Evergrande left of the stage?