Chinese economy could be swept away by loss of confidence in the real estate sector

The loss of confidence in China’s real estate sector could lead to a contagion that would drag the Chinese economy further down, analysts warned.

The comments come after beleaguered developer China Evergrande Group failed to deliver a promised $300 billion restructuring plan this weekend.

In its filings with the Hong Kong Stock Exchange, Evergrande instead said it had “provisional principles” for restructuring its offshore debt. It also said that one of its subsidiaries, Evergrande Group (Nanchang), had been ordered to pay an undisclosed guarantor 7.3 billion yuan ($1.08 billion) for defaulting on its debt obligations.

“For the government, the priority is to break the negative feedback loop that characterizes the high leverage ratio and liquidity crisis on the part of developers,” Shuang Ding, Standard Chartered’s chief economist for Greater China and Northern Asia, told CNBCs. Street Signs Asia.”

“That leads to a mortgage boycott and a very low appetite from the home buyer, and that goes back to the developer as low sales affect his liquidity.”

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China is facing a mortgage revolt with homeowners in 22 cities refusing to pay their loans for unfinished housing projects.

“So if this problem is not properly addressed, it will have a major impact on the economy, including the government balance sheet, the bank balance sheet and households,” Ding said.

Ding said the problems in China’s real estate sector threaten a crucial foundation of a robust economy: market confidence.

Land sales, which are a dominant part of the provincial government’s revenue, have fallen by 30% in the past year.

The economist said Beijing should define the problems in the real estate sector and tackle them holistically, rather than a piecemeal approach., with the aim of avoiding massive insolvencies.

Dan Wang, chief economist at Hang Seng Bank in China, said the government can do this by ensuring the troubled companies have enough money to complete construction of semi-built houses or complete a sold project.

China’s politburo last week indicated the country could miss its 5.5% GDP growth target for the year, while new data showed Chinese factory activity contracted unexpectedly in July following the Covid-19 recovery. lockdowns in June.

While Beijing is taking the real estate crisis seriously, the Evergrande crisis is unlikely to be resolved anytime soon and may never be resolved at all, said Sandra Chow, CreditSights co-head of Asia-Pacific research.

“I think it will take a long time for investors to gain confidence, not just in Evergrande, but in the Chinese real estate sector as a whole,” Chow said.

“The real estate market in China is still in trouble despite all the easing measures and asset values ​​are still falling, especially in the lower segments, so it will be very difficult to rebuild confidence.”

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