China's Real Estate Crisis Is Deepening, With Developers Hemorrhaging Value
JPMorgan Chase analysts expect Chinese developers to report a 30% year-over-year drop in first-half earnings when they release their financial statements this month, Bloomberg reports. So far this year, Chinese real estate companies have lost at least $90B worth of value in their stocks and dollar bonds.
A raft of real estate industry data released by China's National Bureau of Statistics depicts a nationwide decline that is only increasing in severity, according to Reuters. Property investment dropped 12% year-over-year in July, the largest such drop this year, and construction starts declined by 45% from June to July in terms of floor area — the steepest monthly drop since 2013.
With domestic bank loans to developers dropping nearly 37% and investment from foreign capital dropping by 200%, privately owned companies are in "survival mode" to finish construction projects since raising new capital has become virtually impossible, an anonymous development executive told Reuters.
Even delivering new units is less lucrative than it has been in recent years, since home prices dropped 0.9% from June to July, accelerating from a 0.5% decline the month before, per Reuters. Home prices in China have now declined for 11 straight months. Retail sales, industrial output and investment all missed economist estimates in July, reflecting how far-reaching the problems have become for the country and its homebuyers.
With real estate representing 25% of China's economy, the national outlook has dimmed. The People's Bank of China, the country's central bank, announced it is cutting the interest rate on a form of medium-term loans to financial institutions by 10 basis points, Reuters reports. Combined with a decision to withdraw hundreds of millions of yuan from the banking system, PBOC's actions surprised analysts worldwide and signaled the Chinese economy is in worse shape than outsiders believed, Bloomberg reports.
There is little faith from observers and anonymous insiders such incremental financial policy will make a dent when compared to the continued disruption of China's "Zero Covid" policy. The policy imposes stringent shutdowns and lockdowns wherever cases pop up, be they at industrial sites or retail and entertainment destinations, Bloomberg reports.
As the canary in the real estate coal mine last year, Evergrande is experiencing backlash from customers at a virtually unprecedented scale in the authoritarian environment of China, where widespread demonstration is often met with brutal force, Bloomberg reports. Hundreds of thousands of mortgage borrowers have launched a boycott of loan payments at unfinished Evergrande projects until the developer completes construction.
At the same time, a financial watchdog in Hong Kong has launched a new probe into potential wrongdoings by Evergrande executives, Bloomberg reports.
What optimism remains is tied to September being a traditional peak month for the real estate market and what could come out of the upcoming meeting of the country's National Congress of the Chinese Communist Party, an every-five-years event that could produce a more decisive policy response to the real estate industry's dire state.