China’s property crisis has been lingering for over two years. The latest development was Hui Ka Yan, the founder and chairman of China’s largest property developer the Evergrande Group, was arrested and placed under police surveillance at an undisclosed location.
To what extent are developers responsible for China’s property crisis?
Rich Chinese flocking to Singapore for property hunting?
Since the beginning of the year, our media (and many in the financial and stock markets) had placed big bets on China’s rebound after reopening to boost the world’s economies. There were countless talks and predictions on revenge consumption, revenge travel and revenge overseas homebuying of the rich Chinese.
Unfortunately, the reality proves that this is just their wishful thinking. After three long years of total lockdown, the rich Chinese are no longer what we knew before the pandemic.
During last week’s Golden Week holiday, a record number of Chinese chose to travel inside their country. Domestic travel spendings achieved record high. According to Trip.com, by the end of September China’s outbound travel only recovered to around 60 percent of pre-Covid levels.
China used to be the top source of tourists for Singapore, occupying one-fifth of total arrivals in 2019. Thanks to the strong Singdollar and negative news about kidnapping of Chinese-speaking tourists in Southeast Asian countries. Lianhe Zaobao said Chinese tourists visiting Singapore during the Golden Week is 80 percent less than 2019. In fact, arrivals from China were only back to 23 percent of pre-Covid levels in the first half of 2023.
Where are the rich Chinese property agents claimed will be flocking to Singapore for property hunting, except the high-profile money laundering case widely covered in the media?
As I said in my book Behind The Scenes of The Property Market, the media has proven to be the worst predictor of what will happen next. If we compare old news headlines with what actually happened later, we will see why we should never take any clue from the media, especially from those with vested interests.
How bad is China’s economy?
Due to sluggish global demand, China’s July export has its biggest fall in over three years. Indeed, nine months after reopening, China continues to suffer from a depreciating currency, slower growth and a weak economy.
Youth employment is so high that the government has stopped reporting the figure (estimated to be 46.5 percent now). More young people are moving back to stay with their parents. They make a living out of being a full-time son or daughter. They take care of their parents in exchange for meals, accommodation and pocket money.
The western media called China’s slowdown “economic long COVID”. Inevitably, this “end of China’s economic miracle” is hurting tourism, trade and investment in the rest of the world.
Under the pressure of bad news and negative critics, it is imminent to find a scapegoat. It is convenient to blame the developers for the country’s economic crisis. After all, the real estate sector accounts for 29 percent of China’s GDP. Bloomberg said about two-thirds of the 50 major developers are defaulters. The US dollar-denominated bonds issued by Chinese developed have lost 87 percent in value over the past 24 months.
Late last year, analysts applauded stimulus from the government and easing of monetary policy from the central bank. Many bet on the recovery of the country’s real estate industry. Property stock prices bounced back. It was not until July that people finally woke up from their market rebound dream.
From top to flop – the Evergrande story
Suddenly, China’s National Bureau of Statistics shared housing-related data that have never been disclosed: As of August, the combined floor area of unsold homes stood at 648 million square metres. Nationwide apartment vacancy rate is 12 percent and 16 percent in 3rd tier cities. Even China’s 1.4 billion population cannot fill up all the vacant homes. That is before counting the country’s uncompleted or abandoned projects.
Obviously, the main culprit is developers. They are the ones who leave unfinished project victims in despair. Building ghost towns is against Xi Jinping’s housing directive “homes are for staying, not for speculation” (房住不炒). Overleveraging and overbuilding show developers’ greed and lack of integrity.
Now it’s time the government brought “the enemy of the Chinese people” to justice. – the chairman of the industry’s market leader which has the highest liabilities of US$327 billion and over one million unfinished homes.
Hui Ka Yan, the founder of Evergrande becomes the latest “from rags to riches to under investigation” Chinese billionaire. The 65-year-old was born in a poor rural family in China. He founded Evergrande in 1997 and his fortune ballooned to US$45 billion two decades later in 2017. He was third on Forbes’ 2020 list of the richest in China.
Since end of 2020, we saw crackdown of major industries in China one after the other – hi-tech, showbiz, property, tuition and casinos.
The detention of the Evergrande founder was a signal sent from Beijing that China won’t let disgraced tycoons off the hook so easily. Company founders who committed commercial crimes can have their personal wealth confiscated through heavy fines. The central government don’t care about the potential impact on the companies and their stock prices. These are not state-owned enterprises anyway.
Developers the main culprit of China’s property crisis?
Leveraging has played magic in the red-hot China property market. With loans from the banks, developers submitted high bids to acquire land sites. They launched new projects immediately after winning the bid and use homebuyers’ downpayment to buy the next plot of land.
The rule of the game is: Always bid higher for the next site to push up the value of the last property project. In return, developers are able to borrow more from the bank. Keep repeating it and total assets escalate. With higher asset value, the banks are willing to lend more. High borrowing power also enables developers to bid for more expensive sites.
Higher land prices help to generate impressive revenue for the local governments. When homebuyers see bidding prices of new sites soar, they rush to buy because they take the hint that property prices will continue to go up in the future.
For two decades, this money-making machine worked well for developers, banks, local governments, agencies and investors. Until 2021 President Xi poked the China housing bubble by restricting developer borrowing with “the three red lines”. Evergrande was hit the hardest because it was the biggest player of the leverage game. (Read “What did deflation of China’s property bubble tell us”)
Xi said “homes are for staying, not for speculation”. Investment companies speculating in properties were questioned by the authorities. It was illegal for agents to sell second-hand homes above “government guided price”. Banks also tightened borrowing for homebuyers.
As a result, property prices and volumes fell. Developers couldn’t clear new homes to repay their loans. They had no choice but to release new debts to cover old debts.
Land auction was a major source of revenue for local governments. After the crackdown, it fell off a cliff. According to IMF, local governments are now sitting on more than $9 trillion debt.
Why nobody step in for Chinese developer bond payments
The Chinese government started tightening in-country borrowing by developers since mid-2017. When domestic financing options were exhausted, developers went abroad to issue offshore bonds. That is why majority of bonds defaulted or will be defaulted are in the US (some funds available to Singapore investors are also exposed to the China property sector). It also explains why the western media keep reporting outstanding bond payments of Chinese developers.
According to China’s local media, Country Garden’s senior management admitted that the company’s current assets can settle the US$22 billion bond payments. But what about the outstanding loans in China? What about the uncompleted projects that Xi ordered them to finish building by all means? When the developers stop building, the owners will stop paying their mortgage. This will result in a bigger deficit for the developer. If the situation worsens, the whole country’s financial system might collapse.
With the government direction to “take care of apartments not loans” (认房不认贷), the priority of developers now is to complete unfinished projects first. If there is money left, it will be used to settle domestic loans. As for offshore bonds bought by foreign investors, this is not their priority and have to leave it alone for the time being.
As some China experts pointed out, China understands very well that the Americans have never learned their lesson from their subprime crisis. Under greed, China mortgage-backed securities or bonds attracted US funds like bees to a honeypot. This was President Xi’s strategy for US-China Trade War 2.0. Except this time the mass export of China real estate junk bonds to the US comes with zero production cost and zero tariff. It is a perfect way to drain the too big to fail American financial institutions and fund houses without firing a single bullet.
Food for thought
Most people outside China have little understanding about the country. This is not limited to the Chinese language and the people’s culture. Many have no clue about the Chinese government and how the Chinese do business. Yet when it comes to buying properties or bonds branded “made in China”, they take the plunge with a leap of faith.
On the other hand, our local media are mainly re-posting articles about China from western media such as Bloomberg and Reuters. They are giving us the American, British or western point of view. To get the full picture, it is best to read articles from China, Hong Kong and overseas Chinese media preferably published in Chinese.
“It doesn’t matter where you want to put your money in, you should do your own research instead of relying on a middleman for advice. Remember the book Where are the Customers’ Yachts? recommended by Warren Buffett? Someone was admiring the yachts of the bankers and asked where the customers’ yachts were. Lesson learned: If you listen to your brokers or consultants, they get rich, but you get broke.”
– Vina Ip, Behind The Scenes of The Property Market
I will share with you the good deals in the current market and how to do your research in the new online course Buy The Right Condos. You can also check out other online courses.
You can watch the recording of the presentations at the 2023 Mid-Year Singapore Property Review and Outlook seminar. Watch the presentations of Ku Swee Yong and Vina Ip here.
The video 2023 Singapore Private Home Market is available for viewing here.
If you need advice on property matters or residential properties in Singapore, you can check out my one-to-one consultation service.
My book Behind The Scenes of The Property Market is available for preview and order online.
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