China’s crumbling property market risks popping a debt bubble that has floated out of control for more than two decades.
On Monday, a Hong Kong court ordered the liquidation of Chinese real estate giant Evergrande, which is sinking in at least US$300 billion of red ink. The crisis unfolded in 2021 and has since spread across the entire real estate sector.
“I think the bigger surprise here is that it took so long for Evergrande to be liquidated,” Matt Simpson, a senior analyst at the City Index in Brisbane, said.
“Clearing out the deadwood should be seen as a positive, but I doubt it will boost confidence in the property sector,” he added as reported by the Reuters news agency.
- Evergrande was once “a pillar of China’s economy.”
- Its rise and fall have spread beyond the housing market.
- Rival developer Country Garden is also in deep trouble with debts of $196 billion.
Why this matters: Up to 90% of household wealth in China is tied up in property. Real estate also makes up around 30% of gross domestic product in the world’s second-largest economy.
Delve deeper: Fallout from the property crash has descended on the broader economy, squeezing consumer spending and plunging local governments into spiraling debt.
Big picture: “We’re in a recession. If you talk to 10 people, seven will say we’ve had a bad year. I don’t think the government can afford that,” Zhu Tian, an economics professor at the China Europe International Business School in Shanghai, said.
China Factor comment: As we pointed out last week, local government debt is hovering around $11 trillion. Land sales have dried up during the real estate crisis while excessive borrowing in the past 20 years has created the perfect economic storm for Beijing.