Two years have passed since real estate developer Evergrande, the second-largest in China by sales volume, showed signs of weakness. Its particular bubble began to empty in 2021, when for the first time it was unable to pay its debts and major weaknesses in its business were revealed: the company had accumulated more than 300,000 million euros in debt, and the troubles in the market weighed on the company’s liquidity, threatening the completion of already paid promotions and thus spreading fears of contagion throughout the construction sector both inside and outside the Asian superpower.
But despite suffering $81,000 million in losses between 2021 and 2022, the developer has managed to stay afloat. Evergrande is still working on 1,300 developments in 280 cities. Today, however, he decided to throw in the towel and file for bankruptcy in the United States. It’s not a measure that fuels the company’s collapse, as it only owes around $19 billion in debt abroad. He intends to protect his assets across the Pacific while embarking on the deep restructuring required to survive in an increasingly deteriorating economic environment
Although they haven’t done as many covers as in the case of Evergrande, the truth is that since the outbreak of the pandemic in China, numerous promoters of a much more modest size have disappeared. The sales volume of the country’s top 100 developers fell by 33.1% in July compared to the same month last year (it is around 60% of the level of 2019), and house prices marked the first setback of 2023: they fell compared to June by 0.2% and the annual rate by 0.1%. It seems like a negligible drop, but it hides the catastrophic differences that exist between the buoyant markets of big cities like Shanghai, Beijing, or Shenzhen and those of other tiers, where the bump is much bigger.
It is not for nothing that prices in the 35 smaller cities included in the basket used to compile the statistics have fallen for 17 consecutive months. And this is a very dangerous situation both for the economy—the real estate sector accounts for almost a quarter of GDP, and its problems have led to a significant drop in growth forecasts—and for society, which traditionally relies on investment in housing.
Trust falters. Real estate investment fell 8.5% between January and July this year; only 37% of pre-pandemic homes are being built, and more are choosing to postpone buying in anticipation of prices bottoming out. This increases the risk that the situation will end up in a vicious circle.
Currently, the second world power’s main private sponsor, Country Garden, has already made it clear that it is also in serious trouble. Last week, he failed to meet his various bonus payments, and many assume he will follow in Evergrande’s footsteps.
In any case, the problems in the Chinese economy are widespread and are clearly reflected in the deflation recorded in July, the drop in exports, and the difficulties in activating domestic consumption, which the Communist Party hopes to achieve with a battery of 20 measures approved on July 31.