China’s property bubble bursting, with possible global ramifications. By Ian Verrender.
At its peak, three years ago, the Hong Kong-listed China Evergrande was the world’s most valuable real estate group. It’s now better known as the world’s most indebted property developer, owing more than $US300 billion ($403 billion).
Once a symbol of glittering success in the most exciting property market on the planet, China Evergrande is now tanking, and dragging many of its competitors with it, as global investors and creditors desperately attempt to parachute out of the troubled Chinese property sector. …
Contractors are lining up for payment, and creditors are fleeing, willing to accept less than 30 cents in the dollar from anyone game enough to buy Evergrande debt. Meanwhile, tens of thousands of hopeful apartment owners are fretting that a collapse may see their deposits evaporate.
The only way the group can lift cash flow is to sell off its vast portfolio of apartments at heavy discounts. That is threatening to undermine prices across the country and potentially cause the collapse of rivals as the entire industry comes under pressure. …
As an industry, Chinese property development is a hungry consumer of natural resources, particularly iron ore, the price of which has shed almost 40 per cent since May. …
The Chinese property boom drove iron ore prices (and Western Australian mining royalties) to historic highs, but they are now falling like a rock:
Property developers account for around half of all China’s iron ore demand. …
Late last year Beijing introduced what it called the Three Red Lines policy for property developers, a strategy that aimed to reduce debt within the industry, curb runaway property prices and lift standards.
The dramatic interventions have been a long time coming and, the real estate barons should have been prepared, particularly since President Xi Jinping’s not so subtle dig in 2017 that “housing is for living in, not for speculation.” …
It is uncertain how far Beijing will allow this to run. …
On several occasions, reforms designed to restrict risky lending backfired when credit markets seized, forcing the central bank to inject liquidity, which resulted in an explosion of high-risk lending.
Bottom line: Beijing is facing an economy whose wheels have suddenly come off, and unless China’s political elite is willing to unleash another massive monetary and fiscal tsunami and bail out the economy all over again — something Beijing has repeatedly vowed it won’t do this time — a hard landing, whether or not accompanied by a Volcker Moment, is virtually guaranteed.
Live by money printing, die by money printing.
The next global harm from China may be an economic crash. Ok, this one won’t be their fault, but the deliberately engineered property crash in China could be the trigger than pricks the epic, worldwide debt balloon.
