Evergrande with distress sales: Experts fear real estate collapse in China - will Beijing intervene?

Created: 01/12/2022, 11:57 AM

From: China.Table

Crisis group Evergrande sells silverware: The real estate developer's name was removed from the former headquarters in Shenzhen on Monday.

© Imago / VCG

As a result of the real estate crisis, the rating agency Fitch is assuming a fall in prices on China's housing market.

But is Beijing really going to let it go that far?   

• The rating agency Fitch expects a sharp drop in prices for apartments in China during the Evergrande crisis.

• The government, however, does not want the group to collapse completely and could intervene.

• This article is 

  available to IPPEN.MEDIA

   as part of a cooperation with the 

  China.Table Professional Briefing -

  China.Table

   first published it 

   on January 12, 2022.

Beijing / Berlin - The US rating agency Fitch provides a gloomy outlook on China's * real estate market.

In their latest report on the global housing market, the experts warn that the People's Republic of all places could be one of the few countries in the world where real estate prices not only stop rising - they could even fall sharply. 

Fitch predicts that Chinese house prices are likely to fall by three to five percent this year as well as next, largely due to ongoing difficulties facing major Chinese property developers. The agency predicts that more of these real estate companies * will default on their loans in the wake of the Evergrande crisis. This is likely to lead to a loss of confidence among home buyers. "While we expect the authorities to step in to contain market volatility, the downside risks are substantial," writes Fitch. 

When it comes to the future of China's real estate developer, the fate of Evergrande itself will play a role. The real estate giant, which is in acute financial difficulties, is still trying everything to somehow survive. At least the group is trying to give the impression that it is working at full speed on a solution for its creditors. After company aircraft have already been sold, the group has now also parted with its headquarters in the southern Chinese metropolis of Shenzhen *. The employees of the neat skyscraper in the Nanshan district had already moved out a month ago. On Monday construction workers unscrewed the company logo from the roof. In the future, business will again be run from the neighboring city of Guangzhou, where Evergrande was once founded. 

Evergrande: Selling silverware cannot offset hidden risks

But the sale of silverware and the downsizing of the company's own office space does not change much in the almost hopeless situation of the group.

With its rapid expansion, Evergrande has amassed more than € 260 billion in debt *.

At least that much is in the books.

But beyond that there should be further obligations of 150 billion dollars. 

Evergrande wants to get some air through negotiations with his creditors.

Last week the group announced a plan according to which interest payments due soon should be postponed by half a year to the summer *.

Smaller competitors like Kaisa or the Aoyuan group are also exploring how they can pull their necks out of the loop again. 

China: Government does not want a complete collapse of the industry

In the end, however, it will depend less on your own negotiating skills and more on Beijing's further plans.

After all, China's real estate developers are mostly in trouble because the government suddenly tightened the reins on the entire industry last year for fear of a debt bubble.

Beijing wants to reduce debt and take stronger action against speculation with apartments. 

For this, Beijing drew "three red lines" *: The ratio of liabilities to assets must not exceed 70 percent.

The net indebtedness must also not be more than 100 percent.

The third “red line” concerns the ratio of liquid assets to short-term liabilities of companies, which must be greater than a factor of one.

The government has made it clear that an example should be made to Evergrande, which is why a complete rescue remains unlikely.

But sending a group of experts to the group also shows that a collapse will not be accepted either.

China's real estate sector: 25 percent of economic growth

The government knows: The real estate sector accounts for more than a quarter of Chinese economic growth *. 70 percent of Chinese household assets are in real estate, which is why a crash would lead to angry reactions from the population *. As a result, the government seems to have come to the conclusion that reforms are still necessary, but do not necessarily have to be done with a crowbar. This even seems to apply to the "three red lines". State media reported on Friday about Beijing's plans to defuse them a little. 

According to observers, relaxed rules could ensure that developers who are still relatively healthy are more willing to purchase construction projects from companies in crisis like Evergrande - and to go into debt for them.

In the best-case scenario, the market could then be rearranged through mergers and acquisitions without major upheaval.

If this scenario occurs, the major price decline in China's housing market is unlikely to materialize in 2022.

By Gregor Koppenburg and Jörn Petring 

Jörn Petring

 and 

 have been living as freelance authors in Beijing for several years.

since the beginning of 2021  .

This article appeared on January 11th

 in

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