Speaking of contagion, China is dealing with an outbreak of real estate market ebola.
Evergrande is in far more serious trouble than Fantasia Holdings, and far larger, but both need to be watched. When China catches a cold, literally …
China faces the same problem we have here, which is trying to rebalance its entire economy after being overly dependent on its massive real estate investment sector for jobs and growth. We’re still dealing with vampires like Eric Watson, one of our worst. China has their own.
The Chinese central government has been maintaining strict rules that force indebted developers to reduce leverage, as well as measures aimed at preventing a bubble in home prices. The result is refinancing debt is becoming increasingly difficult for the sector, with junk-related or unrated real estate firms struggling to find buyers for their notes. At the same time, sales of homes are plunging, Major developers recorded a 30% drop in sales in September from a year earlier, according to the analysts at Jefferies, citing China Real Estate information Corp data.
I don’t see many analysts saying that the Chinese central government will simply step in and guarantee all Evergrande’s debt and just bail it out. On the contrary I’d see the Chinese government letting Evergrande fall as a sign that it trusts its own economy to correct itself. I think it will seek to protect the apartment investors themselves (if anything) and let the company itself just fall.
But as the Chinese government has shown, the skill to intervention is in timing. The Reserve Bank of Australia came out with a new Financial Stability Review with specific warnings on this: “If they act too quickly in addressing these vulnerabilities, confidence in the implicit guarantees that underpin much of China’s financial system could collapse, which would lead to financial distress.” That is a very strong warning in RBA language.
The Chinese government has certainly intervened in other big companies recently, one of which was on the day before Ant Group was due to launch. Timing! China did remarkably better out of the 2008-9 Global Financial Crisis than the United States or the European Union, through massive monetary and fiscal stimulus. The Chinese government also responded strongly to the stockmarket meltdown of 2015. So it’s hard to critique their policy skill if one can’t always figure out why they step in in such an apparently erratic way and make it so hard for investors to trust the system to abide by clear rules (Having said that, state regulation of the daily time young people can spend on video games is simply beyond fascist. The entire National People’s Congress should have to do compulsory babysitting through school holidays and see how they really feel on that policy).
Since brutally crashing Ant Group’s party in November last year, it has introduced a slew of regulations around the funding of Chinese tech companies.
One can certainly imagine that China will place a much more stringent set of funding regulations around property developers after Evergrande.
I shudder think what would happen in New Zealand if our government made a similar frontal assault on the debt of developers, rather than just choking off debt availability and decreasing its tax break loopholes. New Zealand’s boom in development is the price we are paying for getting the market to do the responses to the crisis in housing availability.
For Chinese real estate developers, the old idea of implicit guarantees of debt or equity have disappeared. You wouldn’t see the equivalent of a South Canterbury Finance guarantee like we did. It does appear to be a really important step in that China is allowing market discipline to sort out a financial system that had been jacked on corruption. But fostering that will require government action in areas other than debt. Effective discipline requires not just the elimination of implicit state guarantees but also measures to improve corporate governance, enhance transparency and accounting standards, and impose more stringent auditing requirements. Otherwise you just get more investors building companies that they think are just too big to fail, so they get away with anything.
To me Beijing is showing that it is serious about how it lets real estate developers fall, and in general how domestic resources are allocated well beyond its reserve command-and-control powers,. It is regulating harder and bailing out less, which will in time reduce uncertainties for all investors in China foreign and domestic. That will make real estate price collapse flowing out to New Zealand less likely.