China Evergrande, one of the country’s biggest property developers, filed for bankruptcy protection in the United States on Thursday. The move follows deepening tumult in the country’s real estate sector, sparked by a string of defaults from Evergrande and other smaller developers that threatens to pull down China’s wider economy.
The filing comes as Evergrande continues to grapple with its $335 billion liability reported at the end of last year. Entering into an ongoing negotiation with its creditors in Hong Kong and the British Virgin Islands, the company said in a statement on Friday that it was “pushing forward its offshore debt restructuring as planned” and petitioning for the U.S. court’s approval. Fellow giant developer Country Garden, facing increasingly urgent demands for repayment on its unpaid bills now totaling $200 billion, could soon be next in line for bankruptcy.
With the company’s financial fragility becoming more glaring with each passing day, experts are asking questions about how much longer the Chinese asset bubble can keep inflating before popping.
China’s real estate market is experiencing an economic crash, with evidence seen in Evergrande’s on-going negotiations with creditors. This follows a shift several years ago in government policy towards cooling the property market. Chinese President Xi Jinping ordered that homes should be for living, not for speculation, followed in 2020 by limiting the ability of real estate companies to finance their projects.
This policy change observed the impact of too much speculation and overbuilding within the housing sector, leaving frustrated and indebted homeowners with no real return on their investments. The exuberant housing market that had paralleled China’s rise as an economic power is now unable to make up for its costly financial practices.
As China’s economy struggles to recover from the devastating impacts of the coronavirus, a blistering housing market has now added to the country’s woes. According to research firm Gavekal Dragonomics, Evergrande had presold 720,000 incomplete apartments at the end of last year. Nomura analysts wrote this week that China’s property sector is undergoing an “unprecedented correction”.
Country Garden, one of the largest real estate companies in China, estimated earlier this week that its losses in the first half of 2021 may exceed $7.6 billion – and has yet to complete nearly one million apartments across hundreds of cities. Social media commenters have reacted with anger, evoking the memory of Evergrande’s default two years ago.
China’s housing market is in serious trouble and without significant action, it could impact many more people in the coming months. There is a growing sense of urgency for the government to step up and intervene, before it is too late.