Daniel Lacalle October 26, 2021
No economy has been able to ignore a property bubble and, even less so, offset it and continue to grow, replacing the bust of the real estate sector with other parts of the economy. Heavily regulated economies from Iceland to Spain have failed to contain the negative impact of a real estate sector collapse. It will not be different in China.
China has three real estate problems: the massive size of the sector, its excessive leverage, and the amount of developer debt in the hands of average households and retail investors.
According to China researcher George Magnus, writing in The Guardian, “China’s real estate market has been called the most important sector in the world economy. Valued at about $55tn, it is now twice the size of its U.S. equivalent, and four times larger than China’s GDP.”
Considering construction and other real estate services, the sector accounts for more than 25 percent of China’s GDP. Just to consider other previous examples of property bubbles, the average size of the sector was somewhere between 15 and 20 percent of a country’s GDP. And none of those economies managed the excess of the property sector.
Of course, the problem of a real estate bubble is always excessive
leverage. Developers take on too much debt, and the smallest decrease in
housing prices makes their equity vanish and their solvency ratios
collapse.
In the case of China, the level of debt is simply staggering. According to the Financial Times, the ratio of net debt of 19 of the largest Chinese developers stands at over 60 percent to equity. Evergrande is not even the most indebted.
Two developers stand at more than 120 percent net gearing. The top 10
most indebted Chinese developers amply surpass the level of
debt-to-assets that made Spain’s Martinsa-Fadesa collapse............To Read More..........
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