Evergrande: Impact of the Chinese real estate crash on Australia

The next six months will test Australia’s risky decision to rely on this one thing to boost its economy.

It was once said that the fortunes of the Australian economy rested on the backs of a flock of sheep, so dependent on wool exports. But in the 21st century, the fortunes of Australia’s economy now rest on a 200,000-ton bulk carrier filled to the brim with the nation’s bounty of coal, iron ore and other minerals.

In early 2020, as the pandemic sent Chinese cities into the world’s first Covid shutdowns, Australia’s strategy of reliance on China appeared to rest on increasingly volatile ground.

However, like so many other times in recent history, the good fortune of the lucky land has once again come to our aid. With the Chinese government spending heavily on the stimulus, Beijing once again came to Australia’s rescue, with the Middle Empire at one point accounting for nearly half of all Australian exports.

But now, as China’s real estate woes continue amid a clampdown on systemic risk that comes straight from above, Australia’s strategy of betting everything but the kitchen sink on demand. China’s continued for raw material imports seems more and more risky.

Crackdown on Chinese Communist Party (CCP) Property

Since taking office as president, Xi Jinping has consistently insisted that systemic risk in China’s economy and financial markets be addressed.

With homes in some Chinese cities selling for up to 43 times household income and the affordability threshold solid at around five times, depending on who you ask, it’s clear that there is a need to contain the risks.

As you would expect when dealing with an industry that accounts for nearly 30 percent of Chinese GDP, these efforts have had some pretty serious consequences of both intended and unintended variety.

In recent months, Chinese house prices have started to fall, undermining market confidence. At the same time, the most financially vulnerable developers have struggled to access credit, even some companies that were believed to be exceptional in the industry being hit hard by the deteriorating environment in the real estate sector.

As you can imagine, not everyone is happy with the drive to reduce systemic risk in a global environment that Xi sees as highly vulnerable to yet another financial crisis.

Some local governments have backed down as their incomes dwindled in the wake of the crackdown, implementing policies to try to revive the real estate industry.

Evergrande and the risks

During the second half of last year, the impact of the CCP’s crackdown on the real estate industry became increasingly clear, as the woes of mega developer Evergrande made headlines around the world and that concerns have arisen at the highest level of government about the potential impact.

With such a large proportion of Chinese economic activity at stake, and the potential for the impact of a Chinese slowdown to hit a still vulnerable global economy, chances are high that the woes of the real estate sector could snowball into the future. a larger crisis if not managed properly.

While the formal default of Evergrande and the entry into a period of restructuring were not the Lehman Brothers-type catalyst (the Lehman collapse contributed to the onset of the global financial crisis) that some expected, the magnitude problems facing the Chinese real estate sector cannot be underestimated.

The real estate time bomb keeps spinning

According to a recent Bloomberg calculation based on analyst estimates, Chinese real estate developers will need to find A $ 271 billion (US $ 197 billion) to cover maturing bonds, bond payments, trust products. and the deferred wages of millions of migrant workers in January alone.

And these are just the obligations that we know of.

For example, in the case of mega developer Evergrande, for every $ 2 in debt and other bonds it held, U.S. investment bank Goldman Sachs estimated it held around $ 1 in hidden off-balance sheet bonds. .

These shadow bank obligations and other off-balance sheet debt often attract higher interest rates and potentially more difficult refinancing terms in times of difficulty. Compared to loans in more established credit markets, the likelihood of endless problems arising is arguably quite high.

For companies that are in disgrace in the credit markets or in difficulty, mustering liquidity could be quite a challenge.

With borrowing costs currently near record highs, the US dollar-based offshore financing market effectively remains closed to developers looking to refinance or roll over debt. According to analysis by HSBC Holdings PLC, this will continue for at least six months.

The outlook for the new year

Although 2022 is an absolutely vital year for the CCP and President Xi from a political point of view, so far there are few signs that they are ready to abandon their efforts to curb the excesses in the real estate sector. .

On Monday, it was revealed that Evergrande had been ordered to demolish 39 apartment complexes on the man-made Ocean Flower Island in Hainan province. Chinese media report that the planning permission for the apartments was “illegally obtained” and had been “revoked”.

The apartments are valued at around 7.7 billion yuan (AU $ 1.7 billion).

Evergrande only had 10 days to demolish the buildings.

This latest development is further confirmation that Beijing currently has little interest in ending its crackdown, even as the damage to balance sheets and developer viability continues to worsen.

While the local government in China is expected to increase spending on infrastructure in an attempt to offset woes in the real estate sector, the question of whether that will suffice is open.

From the White House to Wall Street, the eyes of the world are on the lookout for signs of how this is all going to play out.

But for Australia, the stakes are higher than almost anywhere else in the developed world. We have taken a firm bet on the Chinese real estate sector and whether the nation’s famous luck comes to our aid again could play a major role in shaping Australia’s economic fortunes in 2022.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommenter

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