A line of 60 uniformed security guards stretched across the entrance to ailing Chinese property giant Evergrande's gleaming Shenzhen tower on Monday as dozens of angry investors demanded answers – and their money – from the company.
The protesters, who claimed they had been "swindled", represent just a fraction of an estimated 1.5m people who pumped cash into Evergrande to buy apartments which have yet to be built – and may never be.
Evergrande, founded in 1996 by the well-connected billionaire Xu Jiayin, rode an urban property boom now running out of steam and is teetering under a $300bn debt burden. The firm was forced to deny an imminent bankruptcy but ratings agencies predict a default, while domestic banks and foreign creditors are on the hook, prompting fears of a “Lehman moment” for the world's second-biggest economy.
"Right now, there are an awful lot of people in China paying for a property from a company that looks like it’s going down the plughole," says Mark Williams, chief Asia economist at Capital Economics.
While Evergrande's crisis has grabbed the headlines, the ingredients of a Chinese property bust have been long in the making. As far back as 2016, Chinese president Xi Jinping warned of a potential crackdown with the phrase that "property is for living in, not for speculation".
That message belies the wall-to-wall billboards, television and even elevator advertising luring buyers to put their cash into property, a portrayed sure option in an under-developed financial market offering relatively few alternatives for investment. Amid higher savings rates and a population that has lived through an economic boom, cash-buying real estate years in advance is common and owning properties – the more the better – is a status symbol.
Iris Pang, ING's chief economist for China, says: "It is a culture deep in the mind of the Chinese, if not all Asians. Look at Hong Kong, look at Macau. Singapore is a little bit different because they have a very generous public housing policy. But across Asia home ownership is a kind of self recognition, a safety net for people’s life or retirement."
A Beijing-fuelled property boom
Strong demand has left average Chinese house prices at an eye-watering 18 times average incomes in a private property market which did not even exist until the eve of the millennium. But this has also been fuelled by Beijing regularly turning to property investment, a sector accounting directly for around 15pc of China's economy, as a short-term fillip to growth during periods of economic turbulence. Companies have leveraged up with the blessing of the government.
Despite vacancy rates of over 20pc, the tendency to overbuild in a country of party officials eager to show rapid regional growth – and gain their next promotion – is also behind the phenomenon of "ghost cities": urban areas filled with half-finished concrete shells.
The deleveraging drive was slowed down by trade war, and then by the pandemic. Last year it gathered pace with Beijing's publication of the "three red lines" for developers, imposing strict new limits on liabilities as a share of assets, gearing of less than 100pc and enough cash to cover short-term debts.
Only a fraction of domestic developers, or just 6pc, complied with the rules at the beginning of 2021, according to ratings agency Standard & Poor's. Meanwhile this year authorities have stepped up efforts to rein in housing prices with measures such as restrictions on home purchases and higher mortgage rates.
Looming demographic crisis
The move to rein in Evergrande and its peers will only add to downward pressure, all while the Communist leadership keeps an eye on social cohesion and a worsening demographic crisis.
China's population grew at the slowest rate since the Fifties in the decade to 2020, according to the latest official census published earlier this year. Meanwhile, the legacy of a rapid economic development and a one-child policy that was abandoned in 2016, means that by 2050 the country is likely to have one retiree for every two workers, compared with a one-in-ten dependency ratio in 2000.
Jonathan Ashworth, a China economist at Fathom Consulting, says property investment has been a "great tool" for growth in the past but adds: "You’ve come to a point where prices are just so expensive in the Chinese cities, so that’s this big issue about inequality. They've felt they've had to do something. The fears have really increased among the authorities on the demographic side. It is generally thought that with house prices being so expensive it reduces people’s willingness to have children, or more than one child."
The movement of China's population to the cities is also expected to slow, catching out the developers who have geared up for further expansion.
Ashworth adds: "The outlook for sales is a lot weaker than [developers] had thought. So they’ve got all these debts that they’ve built up on the expectation that they're going to be able to expand and expand."
As the price of new build property slows to its weakest for five months, bad debts from the sector among China's banks have also grown. That has fuelled concerns over financial contagion as well as the knock-on impact on the world economy from a slowdown in the country's property sector which consumes around a quarter of the world's iron ore.
But Williams says a Lehman Brothers style moment isn't likely, citing the rescue of the failed Baoshang Bank in 2019 by the People's Bank of China as the "playbook" for a bank intervention: "They’ve had a chance to look at 2007 and they wouldn't make the same mistakes. They’ve sort of had a dry run for how to deal with banking sector stresses."
A Government restructuring looks most likely for Evergrande, which Pang puts into the "too big to fail" bracket. "It has to be survival," she says.
That, however, may be of little consolation to the Chinese buyers who have poured billions into Evergrande, as well as the foreign investors holding more than $7bn of the company's US-denominated debt. Weaning the Chinese economy off its appetite for property is likely to be a painful experience.
Additional reporting by Sophia Yan
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