The Tribune

By CHRIS ILLING

CCO @ ActivTrades Corp

China's real estate giants are faltering. Evergrande has filed for bankruptcy protection and competitor Country Garden is on the verge of insolvency. To prevent panic, Beijing could intervene with billions of dollars in aid.

Since the late 1990s, China's real estate sector had enjoyed a years-long, cheap money-driven, boom. Developers got into debt like there was no tomorrow but, by 2018 at the latest, the market was in danger of overheating, which slowly became clear to those responsible in Beijing. The debt levels of many companies in the industry had reached record levels when the authorities significantly tightened the criteria for lending in 2020 with the aim of stopping over-indebtedness.

Many real estate firms in China are now struggling financially, including financial conglomerate, Zhongzhi. The company is considered one of the biggest players in the $2.9trn shadow finance market. Zhongrong International Trust, in which Zhongzhi holds a 33 percent interest, is suffering from the real estate crisis and had missed the deadlines for payments on dozens of investment products since the end of July.

Property developer Evergrande is the largest of many distressed real estate groups, and has now accumulated debts equivalent to $320bn. On August 17, Evergrande filed for bankruptcy in the US. The company sought protection under Chapter 15 of America’s bankruptcy code, which shields foreign firms undergoing restructuring from being sued by creditors.

A week ago, another Chinese developer, Country Garden, was unable to make two interest payments due on loans. The company has a period of 30 days to do so, otherwise bankruptcy threatens in September. At the end of 2022, Country Garden had put its debt around $160bn. The number is likely to have increased since then. Country Garden loses billions of dollars every quarter.

JP Morgan analysts warned of "a vicious circle in real estate financing" after China's largest home builder missed its bond payments. This could exacerbate liquidity stress for developers and their non-bank creditors.

The nervousness about China's real estate sector can be felt not only in China, but also on the stock exchanges in Europe and the US.

Investors are taking note of the latest purchase from money guru Warren Buffet and his investment company, Berkshire Hathaway. The company has secured shares in three US home builders for a total of approximately $800m in the second quarter this year. For many home builders in the US, building a house themselves is currently the better alternative than buying in a difficult market with high interest rates. Let us see if Buffet has the correct instinct once more.