‘Golden days are over’: China’s property tycoons suffer $90b meltdown

Developers were emboldened to take on debt, turning to vast pools of money outside of mainland China. Global investors hungry for higher returns snapped up high-yield bonds. Annual sales of such notes surged from $US675 million in 2009 to $US64.7 billion in 2020, according to data compiled by Bloomberg. The mounting debt posed significant risk to the financial system.

All of this grew in tandem with China’s widening wealth gap.

Crackdown bust

The signs of shifting winds came first in 2016. That year, Xi declared that “homes are built to be inhabited, not for speculation.” The pace of regulatory onslaught picked up in 2020 when China introduced the so-called “three red lines,” capping the loans that developers could take on.

It pinched developers across the board and crushed Evergrande. The company, with more than $US300 billion in liabilities, defaulted in December after running out of ways to source funding, sending ripples across a dozen builders.

Since the beginning of last year, Chinese developers have defaulted on at least $US18 billion of offshore dollar bonds and the equivalent of $US2.5 billion of onshore yuan-denominated debt.

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Xi’s push for common prosperity — which emphasises a more even wealth distribution — underscores the shifting priorities of the country’s upper echelons. China’s central bank governor, Yi Gang, touted a “new development model” for the property industry, suggesting the nation is finally making the long overdue shift toward Singapore’s success story of accommodating most of its population in public housing.

The implications are far reaching. Among them: a likelihood that state-backed developers will be reasserted as dominant operators, a slow but inevitable demise of those that are distressed, and lower expectations for investment returns.

It’s caused unprecedented wealth destruction. Wanda’s Wang has lot 61 per cent of his worth since the end of 2019, Sunac China Holdings founder Sun Hongbin saw nearly 90 per cent of fortune evaporate, while Evergrande’s Hui led the plunge, losing nearly $US24 billion. Many of the tycoons including Hui have dipped into their own pockets to save their operations, adding another drag on their wealth.

Property billionaires now account for less than one-10th of China’s richest people, according to the Bloomberg Billionaires Index, curtailing a group of arrivistes who just started gaining power and influence in the state-dominated country.

End goal

The regulatory fallout is trickling into the wider economy, ensnaring every sector from tech to education, and prompting the government to dial back. Seeking to avoid a full-on crisis, China has relaxed austerity measures for home purchases in recent months and cut interest rates.

Recovery, however, is expected to be slow — not only because of the country’s Covid Zero strategy, but also due to an overhang brought on by a twice-a-decade leadership conclave later this year, where Xi is expected to stay on a third term.

“Apart from near-term economic uncertainty, speculative purchases may also remain subdued given the government’s persistent signalling that a more orderly market development remains the priority,” said Frederic Neumann, chief Asia economist at HSBC Holdings.

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Longer term, China’s ageing population, declining birth rate and decelerating economy means the roaring days of its real estate industry are not coming back.

With the sector accounting for a third of real growth — similar to what was in Spain right before the property burst of 2009 — the government needs to bring it back to global average levels, said Alicia Garcia Herrero, chief economist for Asia Pacific with Natixis SA.

“I don’t think we shall see a V-shaped recovery,” said Garcia Herrero. The government doesn’t “want the sector to continue to grow too fast for too long.”

Bloomberg

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