Real estate crises like China almost always end in banking crises: analyst

• China is trying to manage the asset crisis to prevent problems in the real estate industry from spilling over.
• But one analyst said history shows that credit-driven real estate booms almost always end in major banking crises.
• Real estate has been a key driver of China’s economy, which is struggling to recover after the pandemic.

China is trying to manage its real estate crisis to prevent problems from spreading to other economies struggling to recover after the pandemic.

But history doesn’t seem to be on our side.

Andrew Lawrence, Head of Asia Real Estate at GlobalData.TS Lombard, said: “History shows that trust-driven real estate booms don’t end with a whimper, but rather with a bang. In most cases, it involves a major banking crisis.” , in a Tuesday memo.

China’s real estate crisis has been underway for a long time.sector Began to witness a decades-long real estate boom It grew in the late 1990s, and together with related industries, it has now grown significantly. 30% of the country’s GDP.

But the market was so hot that Chinese developers took on large amounts of debt to build apartments ahead of demand. Developers have built so many apartments that a fifth of China’s homes are now vacant.

The Chinese government tried to calm the market and managed to introduce a debt ratio for real estate developers at the end of 2020. The debt ratio worked, but the policy started an outflow of real estate. Sectors in crisis In 2021, major real estate companies Evergrande fell into a debt spiral. Other Chinese real estate developers I ran into a similar problem and this field is Failed to pay corporate bonds.

“Their business model only worked until their ability to generate sufficient borrowing or advance sales to cover short-term debt was disrupted,” Lawrence said in the report. “Therefore, the end result is likely to be the same: the default.”

Since the beginning of 2020, at least 60 Chinese real estate issuers with a combined dollar bond outstanding of more than $140 billion have defaulted, according to GlobalData.TS Lombard.

Chinese real estate developers are restructuring their debt, but this plan is just a wormhole because they are heavily indebted, spend more than they earn, and don’t have much liquidity. writes Lawrence.

Mr Lawrence said real estate companies had received significant reprieve from the Chinese government as authorities remained focused on managing depressed property prices and debt defaults, while trying to prevent the industry’s problems from spilling over into the broader financial system. He added that it was unlikely that he would be accepted. .

Chinese leader Xi Jinping’s government has also focused on affordable housing, urban village renovations and public infrastructure to boost employment and economic growth.

The country’s financial institutions also face risks as real estate companies continue to rely on bank loans. Lawrence wrote that a Chinese shadow bank with exposure to the real estate sector filed for bankruptcy last week, and the deterioration in credit conditions could cause a knock-on effect on the banking sector.

“This could create solvency issues across China’s over-borrowed corporate sector,” he added.