China is already shaken by the RE crisis – the waves that have arisen there can come back to us too: prices are falling, sales are falling
LRYTAS.LT BUSINESS MARKET PULSE
China is facing a real estate (RE) crisis, with more and more REAL developers announcing impending insolvency. First came the news about the problems of the giant Evergrande. But she's not the only one struggling with debt. At first glance, China is far from Lithuania, but the waves of crisis that have arisen there can still affect us.
In mid-September, it emerged that Evergrande, China's second-largest real estate developer, could not cope with payments for debts in excess of $305 billion. Usd 100 million. In an attempt to cover them, Evergrande sold his property. In early October, trading in the company's shares on the Hong Kong Stock Exchange was suspended. It was updated on October 21st. However, as stated by the company, there is 'no guarantee' that it will be able to meet its financial obligations. Evergrande develops 800 projects in 280 Chinese cities. The company's total assets are valued at EUR 350 billion. Usd 100 million. It is estimated that EUR 200 billion will be used to make a financial investment in the 2007-20 Of this amount, USD 1,4 million was used to make a total of USD 1,4 million. apartments that have not yet been built. The company's shares have depreciated more than 82 percent since the start of the year. Evergrande owes more than 170 banks and 120 financial institutions, writes forbes.ru. According to The New York Times, Beijing's attempts to reduce the threat of the company's collapse could hit the RE market, whose growth has recently been one of the main drivers of the country's economy. "We are seeing a very serious decline in the RE market: falling prices, sales and developer activity. All this may slow economic growth in the coming quarters," Arthur Kroeber, CEO of research company Gavekal Dragonomics, was quoted as saying by the daily. "Evergrande's business development since its inception in 1996 has been loan-based. But why did the company manage to survive for more than 20 years, and problems began to arise right now?
In 2021, the liabilities of RE companies in China amounted to EUR 5 trillion. Dollars.
Firstly, china's residential RE market, which flourished on fertile reform soil at the end of the 20th century, has not recovered from the consequences of the COVID-19 pandemic. Market growth gradually decreased: if growth reached 10% in the first half of 2019, it fell to 3.8 per cent in the winter of 2020 and 4.5 per cent in the summer of 2021. Secondly, building materials have become more expensive. Thirdly, the Chinese government has recently increased the pressure on business by ending loans to heavily indebted builders. Evergrande is currently the most credited REAL developer in the world. Its debt is about 3%. China's gross domestic product (GDP), writes forbes.ru. Evergrande is not the only company with debt problems. China's RE market is generally heavily credited. According to economists at financial brokerage firm Nomura Holdings Inc., the liabilities of RE companies in China amounted to EUR 5 trillion in 2021. Dollars. Debt doubled compared to 2016. As a result, evergrande's collapse in china's RE market could have a domino effect, according to Bloomberg experts. According to their data, sales of china's 100 largest REAL developers fell by 36% in September compared to the same period last year. But Evergrande isn't the only one struggling with debt, noted Christina Zhu, an economist at Moody's Analytics. Recently, many other developers have revealed that they have problems with cash flow. They asked lenders for more time or warned of potential defaults. The problems of RE developers can turn into a crisis not only in the financial market, but also in the labour market. Evergrande alone employs more than 3 million people. People. However, China's central bank reassured that the risk of the crisis spreading was under control and That evergrande would be able to continue unfinished projects. Mark Williams, chief Asia economist at Capital Economics, an independent economic research consultancy, estimates that there are still about 30 million people in China. housing for 80 million people. People. This is almost the whole of Germany, cnn.com observes.
In 2021, the liabilities of RE companies in China amounted to EUR 5 trillion. Dollars. The vast majority - about 90 per cent - of new real estate properties in China are sold before they are completed, which economists say means that any failure could have a direct impact on buyers. However, economists note that, by rejecting a few exceptions, many large developers are financially stronger than Evergrande. It is not surprising that Fantasia Holdings and other Chinese RE companies have joined Evergrande, as well as Luminor Bank's chief economist Žygimantas Maurico. "It is not surprising that increased risk makes it increasingly expensive and difficult for them to refinance their existing huge debts. "The Chinese authorities are not showing much enthusiasm for helping REAL developers, fearing an even bigger housing price bubble – house prices in major Chinese cities are already higher than in the world's richest cities, and population wages are still 3-4 times lower, so housing affordability rates in China are extremely poor," he wrote on his account. "On the contrary, the Chinese authorities seek to reduce the debts of RE developers and curb over-construction of housing". Re and related sectors are a huge part of the Chinese economy, accounting for as much as 30% of GDP. The economist pointed out that as the construction sector slows its turnaround, China's economic growth will undoubtedly slow to no longer the usual 6-7%, and, optimistically, in a pessimistic scenario of 3-4%, or minus 3-4%. "As the construction sector slows down, China will also be forced to raise taxes and/or stop investment in public infrastructure, as Chinese regions currently generate about a third of their revenue from land sales to REAL developers. Sales fell by 90% in September," the economist commented.
He believes China's economic slowdown would significantly slow global economic growth, as China generated about a third of global GDP growth. The good news is that the slowdown in Chinese construction, and the economy as a whole, should reduce commodity prices. In addition, Ž.Mauricas hopes that the cooling, if not the collapse, of the Chinese housing market would remind us that house prices may not only rise, but also fall, so this could also cool the Lithuanian housing market. "The direct impact on the Lithuanian economy would be negligible, as China is not an important trading and investment partner for Lithuania. The impact on EU countries would be greater, but cheaper raw materials would potentially offset this loss," the economist wrote. David Poderis, senior economist at the Macroprudential Analysis Division of the Bank of Lithuania, told lrytas.lt that evergrande's case is special as it is the most indebted real-world realm developer in the world. The company's situation is also aggravated by the fact that it goes beyond all three red lines of the indebtedness indicators established by the Chinese authorities last year (the liability-to-assets ratio is less than 70%, the debt-to-equity ratio is less than 100% and the cash-to-short liabilities ratio is above 100%), and the Chinese authorities decided in August 2020 to reduce the level of indebtedness in the country, that Chinese RE developers will have to submit detailed financial statements and meet these established criteria.
At first glance, China is far from Lithuania, but the waves of crisis that have arisen there can still affect us.
The risk posed by Evergrande's possible bankruptcy is worsening financing conditions, and other Chinese RE developers are also facing difficulties in fulfilling their financial obligations. "There are also signs of a wider contagion in higher-risk Asian corporate bond markets, where bond yields are rising. However, Evergrande's debt outside China represents a relatively small part of the company's total liabilities (around €15 billion), while the euro area's links with china's financial sector are small, so the direct impact on the euro area and Lithuania is limited when Chinese RE companies face financial difficulties," poder commented. Decreased investor confidence In the opinion of the Interlocutor, one of the most likely channels through which the possible bankruptcy of Evergrande could affect the euro area and Lithuania could be a decrease in investor confidence and the resulting stock price correction on world exchanges. However, the securities held by Lithuanian financial institutions represent a relatively small part of their financial assets – about 8 per cent, of which foreign securities make up an even smaller share – 3.7 per cent "Therefore, even if Evergrande goes bankrupt and negatively affects not only the Chinese but also the rest of the world's financial markets, direct influence on Lithuania would be limited. In addition, the strengthened supervision of financial institutions and additionally accumulated capital buffers following the 2007-2008 financial crisis would help to reduce the impact of the shock," said a representative of the Bank of Lithuania.
In 2021, the liabilities of RE companies in China amounted to EUR 5 trillion. Dollars.
According to Mr Poder, it cannot be ruled out that the collapse of Evergrande would increase the cost of borrowing in the financial markets worldwide and could be felt, for example, by banks in northern European countries borrowing significantly in foreign financial markets. In such a case, the bankruptcy of Evergrande could indirectly affect lithuanian banks belonging to the nordic banking groups. However, this effect is likely to be limited as the financial links between banks operating in Lithuania and their parent banks have decreased significantly over a decade. In addition, banks operating in Lithuania finance more deposits than before the financial crisis, and they have now attracted more deposits than loans. There is no reliable data "In terms of the potential impact on Lithuanian RE companies, the financial situation of RE operations and construction companies in Lithuania is good, companies are indebted much less than Chinese RE companies. A good financial situation for companies operating in the RE sector would allow companies to continue operating even in the event of a shock in the RE sector," predicted D. Poderis. Mindaugas Kulbokas, head of the Research and Analysis Group of newsec, an international group of RE companies in the Baltic States, did not paint a dark scenario.
On the Hong Kong stock exchange, trading in Evergrande shares in China's RE and construction sectors contracted for the first time since the start of the pandemic (1) "Imagine a communist China where everything is governed by orders. I think they're going to solve their internal problems with some order, they're going to throw money in. Another thing that foreign investors may have invested there is that their funds may burn. However, I do not see a global problem. In my personal opinion, the biggest problem is that we do not have reliable data on China. The information is dosed and given as they wish, so drawing conclusions from it would be wrong," said Kulbokas.