The Journal. - China’s Property Market Crisis

Episode Date: August 30, 2023

Another Chinese real estate developer could be on the brink of collapse. Country Garden, the nation’s largest property developer, announced it lost $6.7 billion in the first six months of the year. WSJ’s Rebecca Feng explains how China’s real estate market — a key part of the country’s economy — ended up on such shaky ground. Further Reading: -Country Garden, China’s Largest Surviving Developer, Sinks Into Debt Crisis  -China’s Deepening Housing Problems Spook Investors  Further Listening: -China's Evergrande Crisis  -Why Millions of Chinese Young People Are Unemployed  Learn more about your ad choices. Visit megaphone.fm/adchoices

For decades, China has been one of the world's fastest-growing economies. A big part of that was its thriving property market. The home ownership rate is quite high in China. It's much higher than in the U.S. Our colleague Rebecca Fung is based in Hong Kong. Colleague Rebecca Fung is based in Hong Kong. More than 90% of households own their homes compared with about 65% in the U.S. A big reason is throughout most of 2000s and 2010s, property prices have been climbing with little sign of slowing down. So people are more willing to park their money in real estate.

So people are more willing to park their money in real estate. Most economists and analysts would agree that our real estate and related industries, related industries meaning like furniture, cement, whatever, they kind of account for roughly one-fourth of China's GDP. That's huge. That is huge. But the property sector has faced problem after problem over the last couple of years. And now, China's housing market is sinking deeper and deeper into a slump, threatening the health of the number two economy in the world.

Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Wednesday, August 30th. Coming up on the show, the housing market crisis that's rocking China's economy. With Uber Reserve, you can book your Uber ride in advance. 90 days in advance. Perfect for all you forward thinkers and planning gurus. Reserve your Uber ride up to 90 days in advance.

Uber Reserve. See Uber app for details. The real estate industry in China exploded in the 2010s. In 2009, sales of residential homes totaled around $528 billion. A decade later, that figure had soared to over $2 trillion. For property developers, business was booming, and borrowing money to keep up with demand was easy. One of the biggest players in the game was a company called Evergrande. The sheer scale of it is quite astonishing, to be honest. At the height of their valuation, they were the worst, about $50 billion. What is Evergrande as a company known for? Like, what is their reputation?

I think they're sort of known as the bad boy in China property. Like, everyone knew, everyone knew that they borrowed very heavily. They grew aggressively and they borrowed a lot to back that growth. Evergrande also poured resources into other enterprises, Evergrande also poured resources into other enterprises, including a bottled water company and a football club. By 2021, the developer had amassed around $350 billion in liabilities, which included bank loans and bonds it had sold to investors. Evergrande was offering them a very, very, in finance, we would say juicy interest rate, which means that, yeah, everyone was offering them, I think at the peak, like 8% to 13% annualized return. That's very high. So there was a period of, you know, some people would say in the States, like, the music keep playing, right? So you need to keep up with the music. So they really did borrow a lot

and grow a lot. But then the music stopped. In late 2021, Evergrande defaulted, a huge corporate failure that made global headlines. Its default set off a chain of events, and the company would wind up being something of a canary in a coal mine for the Chinese property market. would wind up being something of a canary in a coal mine for the Chinese property market. With no cash to spend, Evergrande couldn't start new construction projects or even complete properties that buyers had already paid for. Roughly 80% of new homes in China are pre-sold, they say. Okay. Which basically means that these homes are sold

and people fully pay for them before they're even finished. Therefore, it creates this possibility where people hope will never come true. Evergrande has said that it was trying to protect the rights and interests of both creditors and consumers. And as of June, it has restarted work on more than 600 pre-sold projects that homeowners are waiting for. 600 pre-sold projects that homeowners are waiting for. I think for an average homeowner, the idea is that, okay, if everyone couldn't finish my apartment, well, can other private developers finish my home?

And homeowners kind of started to have this doubt of whether their homes will be finished, so they stopped buying. Sales plunged, and other industries tied to the housing market also started to feel the pain. There are smaller companies who, you know, they do construction works for Evergrande, and then maybe they sell steel or paint, furniture, windows, doors. They all had to sort of absorb large losses from Evergrande because when Evergrande defaulted, it couldn't pay back to suppliers anymore. So these companies all sort of laid off workers or delayed their payments to their own suppliers. I mean, what ended up happening next is that, you know, developers going down like dominoes. How many developers are we talking about or like what share of the number of

developers in the country? In the year and a half after Evergrande defaulted, you know, every month we would hear about another developer missing payment on their debt. We used to write a story when developers default because that's rare, you know, you don't see developer defaulting every day. But then at one point, I remember my editor was like, because they're all defaulting. Is this even still news? Yeah, is this still news? And then I think we were joking that

if a developer actually made payments, maybe we should write a story on that. Oh my gosh. So I think that spoke to the number of developers defaulting. And I think the count is around 50. We almost stopped counting because there are smaller developers defaulting, and I think the count is around 50. We almost stopped counting because there are smaller ones defaulting too that nobody knew.

So yeah, I think around 50 in the years that followed have defaulted. There have been very few survivors that aren't state-owned companies, and one major survivor is a large developer called Country Garden. Country Garden is roughly the same size as Evergrande, but the two companies had different reputations. While Evergrande was sort of seen as the bad boy of the real estate sector because of its heavy borrowing and risk-taking,

Country Garden was held out by Chinese authorities, actually, to be one of only a handful of model developers last year. There's no doubt that Country Garden had a lot of debts too, but what kind of made it sort of the good boy is that, unlike Evergrande, it focused very, very much on property itself. So that kind of made it just like it's a more focused developer yeah it's funny because like they're actually from the same well at least their headquarters are in the same province but evergrand is much more flashy in terms of many things country garden is very low profile and like in chinese there's a there's a phrase called 闷声发大财. It means like be quiet and just make money.

And that's kind of what Country Garden was doing, actually. Yeah, I mean, even their names, right? Evergrande, Country Garden. The vibe is very different. Yeah, that's a good point. And even as its debt grew, Country Garden continued to make payments to lenders. But the housing crisis would eventually catch up with the company.

That's after the break. Need a great reason to get up in the morning? Well, what about two? Need a great reason to get up in the morning? Well, what about two? Right now, get a small, organic Fairtrade coffee and a tasty bacon and egg or breakfast sandwich for only $5 at A&W's in Ontario. Wherever you're going, you better believe American Express will be right there with you. Heading for adventure? We'll help you breeze through security.

Meeting friends a world away? You can use your travel credit. Squeezing every drop out of the last day? How about a 4 p.m. late checkout? Just need a nice place to settle in? Enjoy your room upgrade. Wherever you go, we'll go together. That's the powerful backing of American Express.

Visit amex.ca slash yamx. Benefits vary by card. Terms apply. By the fall of 2022, China's economy was reeling. COVID restrictions had choked markets, stocks hit multi-year lows, and the housing market had been in a slump for more than a year, with sales falling month after month. Many homeowners weren't happy. There was a so-called mortgage boycott. So, like, many people, because they took out mortgage, they paid the down payment, and then they couldn't get their homes finished, and therefore they kind of threatened to, like, not pay the mortgage anymore.

In November, the Chinese government decided to take action. So there was this kind of a landmark moment, if you will, in November last year, when the China Central Bank, which is called the People's Bank of China, and its top banking regulator issued this document, which basically is like a list of very wide-ranging 16 measures to help resuscitate the property sector. Two of them really stood out. One of them was that the central government encouraged banks to offer financing to stronger developers, hoping that it would take over the weaker, financially weaker developers. So it's sort of a consolidation in the sector, if you will.

And then the other thing is that the government really encouraged banks to roll over the current debt. So maybe a developer owns1 billion to a bank within six months, but now the banks are encouraged to extend that for a year. So it's, you know, relieving the pressure to repay debt for developers. So I think those two measures sort of really stood out among the 16. Then, in December, the Chinese government lifted the COVID restrictions, freeing up the economy after three years of strict lockdowns. By February this year, the property market started to pick up again.

Two months after reopening, it was the first time actually we saw a growth in monthly sales by China's top 100 developers. Collectively, their contracted sales that month in February grew 15% on a yearly basis. That was the first time of growth after like 19 months of declines. You know, at that time, things seemed to have turned a corner. And then we could see actually developers taking action. For example, Country Garden. We had reporting that Country Garden was hoping to buy land again, which was a massive signal in the way that, like, you know, Country Garden as one of the surviving privately owned developers are having hopes for the future again, because buying land means it has hope for the industry going forward.

What happened next? Did it last? It did not. It really did not. Yeah, the recovery was very short-lived, actually. By April or May or so. Wow. Okay. Yeah, it's only, I know, it's only like two months or so. Because I think the reason why it was very short-lived was because, you know, after COVID or after restrictions were lifted, people had this period of time when they could, you know, come out and they did some revenge spending and including buying homes.

But very, very soon they realized that the property market still wasn't, fundamentally wasn't in like a very good shape. So yeah, in short, it's just, there seems to be a lack of confidence in the Chinese home market. It's just there seems to be a lack of confidence in the Chinese home market. So by April, the Chinese property market has already, again, fallen back into like this deep slump, which lasted until today. That market downturn hurt Country Garden too. Earlier this month, the company started to miss some payments. It's a very small amount that they missed. It's about like 22.5 million U.S. dollars of interest payment that they missed on August 7th.

But right now, Country Garden is in a period called the grace period. So there's a 30-day grace period before they would formally default. Country Garden said that it had been caught off guard by the depth and persistence of the market downturn and felt, quote, deeply remorseful for its unsatisfactory performance. If Country Garden defaults, what will that mean for the property market in China? Well, first of all, if country garden default, it means that, you know, China's top privately run developer is done. One economist was describing to me this scenario. He said that, you know, if country garden defaults, then the Chinese economy and the Chinese property market will go through a complete reshuffle. Wow.

Is there any other driver for the economy that could take the place of the real estate market in terms of what it does? Maybe in the future there will be. But I think for now, what we heard from economists is that there is not. There's not a driver. There's not another sector that could readily play the role of the property sector in terms of driving growth. And what about the people who are waiting for their homes? Right. Because it's potentially a factor for social instability. The Chinese government has made sure that it's the top priority of every single developer to deliver homes that they've sold. you know, made sure that it's the top priority of every single developer to deliver homes that they've sold.

But as far as we know, many of the homeowners that, you know, were very angry because their homes weren't delivered, they're still waiting and there's sort of no other choice. And so will the government take any more action? I think that's a question that everyone wants to know. And sadly, I don't. But I think many economists were telling us that whatever attitude that the government takes on the Country Garden case will showcase whether or not it cares about the property market. And we'll have to see what they do. So we're still waiting, basically.

We're still waiting. Maybe going forward, people and investors, you know, global investors and domestic investors alike, they would have to accept a slower-growing Chinese economy. Earlier this month, Evergrande filed for Chapter 15 bankruptcy in the U.S. as part of one of the world's biggest debt restructurings. And today, Country, August 30th. The Journal is a co-production of Gimlet and The Wall Street Journal.

Additional reporting in this episode by Cao Li and Francis Yoon. Thanks for listening. See you tomorrow.