Is China’s Property Crisis Getting Worse?
Over the last four years a number of China’s biggest property developers have gone into default and today the Chinese economy is hobbled by the world’s largest distressed debt of circa USD 160 Billion. The financial markets were shocked when the China Evergrande Group, at the time China’s biggest property developer, received on the 26th of January 2024 a liquidation order from a Hong Kong court. The group had amassed in excess of USD 300 Billion in liabilities during the debt-fuelled years of the China property boom, and on that fateful day in Hong Kong when their shares stopped trading, their value was down 99% from the peak at USD 275 Million.
Today, four years later, the last remaining titan in the Chinese property developing arena, China Vanke Co., warned that they were facing losses of circa USD 6.2 Billion. In the last weeks of January 2025, Chinese officials finally decided that China Vanke Co. was “too big to fail” (a term that has been used over the years for banks where their executives have failed to do their jobs) and faced with a collapse in the company’s bond price, and officials from Shenzhen (Vanke’s hometown) have taken over operational control. The company is also facing USD 4.9 Billion of maturing bonds and redemption options this year whilst the rating agency Moody’s has downgraded the company to Caa1 (Non-Investment Grade– Substantial Risk) which is seven points below investment grade.
Chinese authorities are working on a bail-out package that will help fill the funding gap of USD 6.2 Billion, which has been welcomed by the financial markets. However, despite the authorities stepping in at China Vanke, plus many stimuli packages from the government, analysts confirm that real estate projects in the hinterland (outside major cities) are not receiving any lending from banks. Furthermore, experts advise that circa 12 developers are currently facing liquidation petitions, restructuring deals are falling apart and on the international front, creditors are losing patience.
Another tale of woe is Country Garden whose name used to be in lights along with China Evergrande, now suffering from weak domestic demand and a declining job market. The company has suffered from a year on year 51% decline with contract sales dropping 59% from the previous year to USD 309 Million (Yuan 226 Billion). According to analysts, one major stumbling block (and this, despite government support) is that a substantial number of buyers prefer to purchase second-hand homes as they have a lack of faith in developers’ abilities to finish projects. The markets are holding their breath to see if Country Garden can reach an agreement with creditors on a revised debt plan. Meanwhile, a liquidation hearing in Hong Kong has been delayed by the court.
Sadly market conditions have worsened, and experts point to Sunac China Holdings, when in 2023 they enjoyed a successful debt restructuring (and was hailed by creditors as a blueprint and role model), have recently advised that they may have to do a second restructuring. Analysts also advise that in Hong Kong’s court, liquidation petitions are piling up – with one of China’s biggest builders Shimao Group Holdings Ltd in the firing line. Elsewhere, and in an unfamiliar approach, China Fortune Land Development Co. (In Default) has scrapped a debt plan already approved by creditors and is going for a court-led decision.
Some experts point the finger at leading communist officials who, when the slump took place, blamed them for turning the economy towards economic growth driven by the technology sector, thereby reducing the role of the property sector. The government then cracked down on the massive leverage being used by developers whilst tackling a housing bubble. The property market then crashed with home prices according to experts falling 30% from their peak in 2021, with the housing sector’s financial contribution to the economy falling from circa 24% to circa 19%.
Initially, China’s answer to the property crisis was not to bail out companies but to rather focus on actually delivering homes to buyers. In this respect, they requested (which means told) state-backed companies and local governments to purchase those homes that remained unsold, whilst providing finance on a limited scale to finish uncompleted property projects. The government then sought to improve demand by cutting mortgage rates and lifting restrictions on buying with an end result of not reflating the market but to manage the slowdown.
However, that strategy appears to be in pieces considering the number of developers queuing up in Hong Kong waiting on the courts’ liquidation decisions. Economists are fearful that the property crisis will continue on a downward track, hampering the government’s goal of kick-starting and reviving domestic consumption. Economists are crying out for more stimuli packages when Chinese lawmakers have their annual meet in March. It is hoped this time that the authorities will offer packages that will be big enough and effective enough to stimulate confidence and consumption, thereby boosting a seriously flagging property sector.
