China’s housing mess pinned on Evergrande

Beijing’s promise to improve people’s living standards translated into new homes that in turn fueled massive construction.

Hundreds of millions of middle-class Chinese see property as a key family asset and status symbol.

China’s housing scene took off after key 1998 market reforms that boosted the private market from employer-designated homes — rocketing in a breathtaking building boom on the back of rapid urbanization and wealth accumulation.

But, as prices soared, an anxious Beijing fretted about wealth disparity and the potential for social instability. The average apartment price was 9.2 times disposable income last year, according to services firm E-House China, pricing many out of the market.

Highly leveraged developers have also prompted fears of financial instability. Last year, Beijing introduced metrics to cap debt ratios called “three red lines” and tightened scrutiny over crucial funding raised by presale deposits.

The plan was “to reduce the risk of the riskiest,” said Dinny McMahon, of consultancy Trivium.

“The idea was that this would be a mechanism to force the most risky developers to pare back their debt levels,” he added. “And those that were less risky — it gave them scope to continue growing.”

At the forefront of that rapid expansion was Evergrande, built by founder Xu Jiayin in 1996 to have a presence in 280 cities and an empire that includes mineral water, wealth products and even a football team.

Now one of the country’s largest developers, it is drowning in liabilities of more than $300 billion as it navigates China’s new rules.

All eyes are on how the crisis is handled by Beijing, which has so far remained quiet with lingering fears over consumer confidence and an already weakening property market.

“What starts off as a problem exclusively for Evergrande today could snowball to take in other relatively weak developers tomorrow,” added McMahon.

The three red lines show Beijing’s long-intended aim to restructure the property market, analysts say, but Evergrande’s staggering debts may force the government’s hand to shore up the sector.

Evergrande is the most indebted of China’s private home builders with overwhelming liabilities and wild diversification.

Article and Photo originally posted by Manila Times last September 29, 2021 and written by Agence France-Presse.