The filing for bankruptcy by Chinese real estate giant Evergrande signals the beginning of Beijing’s real estate crisis, CNN reported on Friday.

It serves as a cautionary tale about the “growth at all costs” model that has underpinned China’s spectacular growth over the past 30 years.

For decades, Evergrande, once one of China’s most successful real estate developers, fell deep into debt as China’s economy crumbled. As CNN reports, demand for housing was so strong that home builders often sold apartment units to buyers before construction was complete.

But an abrupt change in policy by China’s leaders two years ago has left the country’s property developers struggling for cash, raising financial risks within the world’s second-largest economy.

According to CNN, the story of Evergrande’s downfall began in 2021 after the central government moved to curb excessive borrowing to slow the rise in house prices, effectively freezing a major source of funds for property developers. properly closed.

Evergrande, which had liabilities of US$300 billion, could not raise cash fast enough to pay its debts.

It defaulted in December 2021, causing panic in the market. What followed was a wave of defaults, and China’s massive real estate market has yet to recover. According to CNN, building was suspended on dozens of projects, leaving many “pre-sale” buyers with no new homes and heavy debt burdens.

The steps taken by Beijing to restructure billions of dollars of offshore loans will have a cascading effect on China’s financial system.

Earlier on Thursday, Evergrande filed for Chapter 15 bankruptcy, a way for foreign companies to use US bankruptcy law to restructure debt. The process will take time, as Evergrande has offshore debt of about USD 19 billion.

Evergrande’s liquidity crisis was only the beginning of the pain. Other large builders in China have since defaulted as they struggle to raise cash and housing demand has collapsed, reports CNN.

In particular, investors around the world are carefully watching the development as Country Gardens, which employs about 300,000 people, defaulted on two payments on its billion-dollar debt and said it was “taking various debt management measures”. Was considering.

Moody’s downgraded its rating on Country Garden last week, reports CNN, adding that the cash-strapped developer’s debt is now seen as a “very high risk” asset.

Country Gardens has until the beginning of September to pay its dues.

It is difficult to overstate the importance of the property market in China. The industry accounts for more than 30 percent of the country’s economic activity, and more than two-thirds of household wealth is tied up in real estate.

But according to CNN, nearly three years of “zero COVID” restrictions slowed China’s economic growth, and consumers have been reluctant to buy new homes because of high unemployment and falling property values.

In particular, China’s economic engines are faltering after a brief spurt in activity earlier this year.

Last month, consumer prices fell for the first time in more than two years; Youth unemployment is rising so fast that the Chinese authorities have not released the figures for July. Retail sales, export demand and factory production have also slumped, reports CNN.

While Beijing has made some efforts to help rising housing demand and free up cash for developers, the days of large, state-funded bailouts for bloated industries appear to be over. It also seems unlikely that China will provide relief to these companies.

CNN recently quoted President Xi Jinping as saying, “We must maintain historic patience and insist on steady, step-by-step progress.”

(Only the headline and image of this report may have been reworked by Business Standard staff; the rest of the content was auto-generated from a syndicated feed.)


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