Evergrande's bankruptcy may be just the beginning of the real estate crisis

China Evergrande, the Chinese real estate giant, has filed for bankruptcy and sought protection from creditors in a Manhattan court.

The debt-ridden company has filed for bankruptcy under Section 15 of the US bankruptcy law, which protects foreign companies from lawsuits by creditors seeking to freeze their assets in the US.

The step taken by China Evergrande, which hopes to limit the damage in this way, risks having an impact beyond the borders of the two countries.

For decades, Evergrande was one of China's most successful real estate developers, and demand for housing was so strong that homebuilders often pre-sold condo units to buyers before construction was complete.

But a sudden change in policy by China's leaders two years ago has left the country's property developers scrambling for cash, compounding a financial risk within the world's second-largest economy.

What happened to Evergrande?

The story of Evergrande's downfall began in 2021, when the central government moved to curb excessive borrowing in an effort to slow rising house prices, effectively cutting off a major source of funding for property developers.

Evergrande, which had $300 billion in liabilities, couldn't raise cash fast enough to make debt payments.

It failed in December 2021, causing a market panic. A wave of failures followed and China's huge real estate market has yet to recover. Construction was suspended on dozens of projects, leaving many pre-sale buyers without a home and with a huge debt burden.

What happens next as it tries to restructure billions of dollars of offshore debt has massive implications for China's financial system.

The next domino to fall?

Evergrande's liquidity crisis was just the beginning of the pain. Other major builders in China have since failed as they struggle to raise money and demand for housing has fallen.

Now, investors around the world are watching nervously as Country Garden, which employs about 300,000 people, missed two payments on its multibillion-dollar debt and said it was considering "various debt management measures".

The cash-strapped developer's debt is now seen as a "very high risk" asset, according to Moody's, which downgraded Country Garden last week.

Country Garden has until early September to make the missed payments.

China's economy is struggling

It is difficult to overestimate the importance of the property market in China. The industry accounts for up to 30% of the country's economic activity, and more than two-thirds of household wealth is tied up in real estate.

But nearly three years of "zero Covid" restrictions have hurt China's economic growth and consumers have been reluctant to buy new homes in the face of higher unemployment and falling property values.

Consumer prices last month fell for the first time in more than two years; Youth unemployment has risen so fast that the Chinese authorities simply did not release July data. Retail sales, export demand and factory production are all down.

Can't Beijing release these companies?

Not likely. While Beijing has made some efforts to help spur housing demand, the days of big state-funded bailouts for bloated industries appear to be over.

As President Xi Jinping said in a recent speech: "We must maintain historical patience and insist on making steady progress, step by step."

Source: CNN