Evergrande: China’s epic property bubble hisses air

Evergrande flats under construction in China

Evergrande has been struggling to service a $300bn debt pile

(Image credit: © JADE GAO/AFP via Getty Images )

Is China facing a Lehman Brothers moment?

Chinese property is in a “bubble of epic proportions”, says Matthew Brooker on Bloomberg. On some measures it “overshadows the pre-global financial crisis” boom in US housing valuations. In Shenzhen a flat costs 43.5 times the average annual salary, three times the figure for London. The market “stands comparison with the Japanese real estate bubble of the 1980s”, which inflicted a “lost decade” on the economy after it burst in 1990.

Turmoil at Evergrande

This week has brought new turmoil at Chinese property developer Evergrande. The group has been struggling to service a $300bn debt pile. Once “the world’s most valuable real-estate group”, today Evergrande is “the world’s most indebted property developer”, says Ian Verrender on abc.net.au. It is trying to sell assets to raise cash, but has warned that it could default should those efforts fall short. The company’s debt sells for less than 30 cents on the dollar. “Contractors are lining up for payment” while “tens of thousands of hopeful apartment owners are fretting” that their deposits are about to “evaporate”. Evergrande’s shares have fallen by 79% since the start of the year.

The property market has been a “key driver of economic growth” in China ever since it liberalised its economy, says Edward Witte in The Diplomat. “Owning property... is seen as a benchmark one must reach before getting married and starting a family.” The result? An estimated 70% of the country’s household wealth is in bricks and mortar. On the broadest definition, the property sector accounts for “a quarter of the Chinese economy”, says Ambrose Evans-Pritchard in The Daily Telegraph. That is “three times the relative weighting of America’s extreme bubble in 2007”. Half the world’s cranes are in China. The Communist Party has concluded that soaring prices are “triply corrosive”. Expensive housing raises financial risk, worsens inequality and is stopping families from having children.

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The clampdown cycle

Authorities have clamped down, says The Economist. Last year, regulators imposed caps on how much property debt banks can hold and demanded that developers adhere to rules requiring them to keep debt under control. The results are already apparent: “Sales of new homes in 30 cities… fell by 23%”, year-on-year, in August.

Some have drawn parallels between Evergrande and the 2008 meltdown at Lehman Brothers, says Evans-Pritchard. But the comparison looks implausible because “the state retains iron control over banks”. Regulators appear to instead be “orchestrating a disguised soft-landing” for Evergrande. Chinese property regulation has historically been “stop-start”, says Brooker. Authorities try to restrain speculation, but whenever the economy weakens “the money taps open… the urgency of [dampening] home prices is temporarily forgotten”. Then the cycle repeats. Some think the latest clampdown will go further. But that would risk a “debt crisis” and a prolonged recession. The property sector “is simply too big, too overvalued and too important to the economy” to be tamed.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.