September 22, 2024 | by Unboxify
How did a 1979 panel with David Attenborough result in China’s current real estate crisis? It’s an odd question, but the answer takes us on a captivating journey through China’s complex demographic and economic landscape.
In the late 1970s, David Attenborough, an iconic natural historian, faced challenges entering China to film his documentaries. He joined a committee panel in China in an attempt to facilitate his work. During this panel, Attenborough asked Chinese higher-up Deng Xiaoping what China planned to do about its rapidly growing population. In response, Xiaoping revealed China’s **one-child policy** to the world. This policy would lead to a demographic imbalance that echoes through China’s economy today.
The announcement of the one-child policy had far-reaching consequences that were not immediately apparent. At the time, it seemed a necessary move to control an exploding population. But with the passage of time, the policy has led to major demographic and economic issues in China.
Key Consequences:
The tip of the iceberg became visible recently. China announced its first population decline in over six decades. Government data shows current birth rates at a record low— the fewest babies born since the founding of communist China in 1949.
In July 2022, a data leak further compounded concerns. It revealed that Chinese authorities had overcounted the population by over **100 million young people**. This discrepancy caused widespread panic and exacerbated existing economic woes.
China now faces a unique problem: too many residential buildings and not enough buyers. Given that the real estate market constitutes about **30% of China’s GDP** and **70% of Chinese wealth**, this imbalance is nothing short of catastrophic.
A major player in this debacle is Evergrande, which was once China’s largest property developer by sales. The company is now strapped with over **$320 billion in debt**, making it the most indebted real estate company globally.
Evergrande’s Overreach
Analysts fear this could be China’s Lehman Brothers moment, and given China’s standing as the world’s second-largest economy, the potential global shockwaves are easy to imagine.
Evergrande isn’t just a property developer. The company had ambitious plans spanning various domains, such as:
While these ventures were exciting on paper, they were funded by a growing mountain of debt.
Evergrande started small in Guangzhou in 1996, but it quickly rose to prominence thanks to the economic boom of the 1990s. Hui Ka Yan, the founder of Evergrande, capitalized on the growing demand for housing, acquiring land at favorable prices and achieving explosive growth.
By 2010, Evergrande’s revenue surged yearly, peaking with a market value of $47 billion and assets worth $353 billion. But its growth strategy was aggressive and unsustainable. The company borrowed heavily to finance land acquisitions, adopting a model that resembled a Ponzi scheme.
Evergrande’s meteoric rise was fueled by several factors:
However, this model was fraught with risks. Borrowing heavily for every new venture led to massive debt accumulation.
Demographic Issues Aggravate Economic Problems
The one-child policy was initiated based on faulty data. The scientist who calculated the projected population forgot to factor in declining birth rates due to women’s education and contraceptive use. Consequently, the expected population boom never materialized. This miscalculation has had far-reaching effects, leading to overbuilding and an unsustainable real estate market.
In China, property ownership holds significant cultural importance, sometimes influencing romantic relationships. Historically, men were preferred during the one-child policy era, which has led to a surplus of men who now need properties to find life partners.
The ease of access to online credit platforms and relaxed lending standards has also contributed to the real estate surge, pushing household debt to GDP from **18% in 2009 to 63.3% by March 2023**.
Property Speculation
An increase in property speculation led to inflated property prices in cities like Shanghai, reaching levels comparable to New York or London. This speculation was aggravated by a lack of stable investment options, leading many to prefer real estate over stocks or bonds.
Recognizing the unsustainable growth, President Xi Jinping intervened in 2020, implementing stringent regulations under the ‘Three Red Lines’ policy aimed at reducing economic reliance on real estate. However, Evergrande and other developers failed to meet these new requirements, deepening their debt woes.
Three Red Lines Policy Includes:
Despite efforts to reign in the market, Evergrande’s financial practices, including a lack of transparency and deceptive accounting, worsened the situation.
The instability in the real estate sector has far-reaching consequences. Evergrande’s debt crisis resulted in shared price plunges, junk ratings from credit agencies, and defaults on bond payments. This had a domino effect on various sectors—construction, material procurement, and more.
On August 17, 2023, Evergrande filed for Chapter 15 bankruptcy protection in the United States. This move aims to protect its US assets from creditors during debt restructuring in China. However, the success of this restructuring is far from guaranteed, subject to approval from Chinese courts and regulators.
Meanwhile, another major developer, Country Garden, also hit financial trouble, losing $7.1 billion in the first six months of 2023.
Despite attempts at restructuring, Evergrande’s situation looks bleak. On August 27, 2023, when trading resumed after 17 months, Evergrande’s stock value plunged 87%, wiping out $2.2 billion in market value in one day. Subsequent arrests of Evergrande officials further eroded investor confidence.
Implications on Global Economy:
More than 1.4 million homes that Evergrande pre-sold are yet to be delivered. Many buyers, including families who invested life savings, face uncertainty and despair. Beyond numbers and policies, these are the human stories that underscore the devastation wrought by financial mismanagement.
New construction in China has decreased by **24.5%** this year alone, and property prices have dropped by as much as **25% since their peaks in 2021**.
Fundamental Market Changes
The scale of Evergrande’s debt crisis means it’s not just about one company. With over $20 billion owed to foreign investors, the shockwaves can ripple through international markets. Evergrande’s collapse could slow down the progress of China’s Belt and Road Initiative, adding another layer of complexity and uncertainty.
Is this China’s Lehman Brothers moment? The question evokes concern, but the context is different. China’s state-controlled banking system allows it to maneuver liabilities more flexibly than the United States did during its banking crisis.
China’s Financial Advantages:
While China’s system may avert immediate bank failures, the long-term impact on consumer sentiment and the real estate market remains a daunting challenge.
Evergrande’s collapse highlights the importance of sustainable and transparent financial practices. Though the company’s downfall poses significant risks both domestically and globally, it also presents an opportunity for China to reevaluate its economic strategy and reduce its heavy reliance on real estate.
While government intervention might stabilize the immediate situation, rebuilding consumer confidence in the housing market will likely take years. The real estate sector’s collapse serves as a stark reminder of the detrimental effects of **reckless financial decisions fueled by flawed demographic policies**.
As this complex saga unfolds, one thing is clear: the consequences of Evergrande’s downfall are yet to be fully understood, but they promise to reshape not just China’s economy, but also the global financial landscape.
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