Date: November 27, 2023 Updated: December 9, 2023
How is China going to fix its Real Estate mess:
Socialism with traditional Chinese characteristics
安得廣廈千萬間，大庇天下寒士俱歡顏，風雨不動安如山。
[杜甫 - 茅屋為秋風所破歌]
How could we have millions of buildings to provide shelters for the poor
so they can stay calm and relaxed. That should withstand the storms
as safely as a mountain.
[Du Fu - Song of Thatched Cottage Broken by the Autumn Wind]
China's strategy - patience and let things work out by itself. Too much
tinkering will have unexpected negative effects
The Chinese government is in no rush. It has a strategy to let the
situation work itself out slowly.
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China will not let those speculative conglomerates die. Bankruptcy is
too easy an exit for those who profited from the scheme. It is not
China's way of doing business. Bankruptcy, liquidation or bailed out
by the government is against the Chinese principle.
Allowing the failed real estate developers to collapse would not just
leave many Chinese banks with bad debt, it would also leave hundreds
of thousands of Chinese home buyers without an apartment that they
have paid for.
That's why China will keep those business entities alive and not
allow them to die. Those who created the mess will have to clean it
up themselves, as more than a million people in China are still
waiting for their homes to be completed.
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China will arrest those responsible and claw back the huge ill-gotten
profits. A bankruptcy and liquidation will create social upheaval.
In September 2021, there were chaotic protests at Evergrande group's
Shenzhen headquarters demanding repayment of loans and financial
products. That's exactly what China wants to avoid.
The founder and many high level officers of Evergrande group were put
under police surveillance, and eventually the chairman was formally
arrested, together with many of the core members of his group.
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Claw-back of the huge ill-gotten profits.
The chairman of China Evergrande Group had previously paid more than
CN¥90bn in dividends to some offshore companies in the Cayman
Islands controlled by his now 'technically' divorced wife.
It is entirely possible that she might decide to 'loan' back some of
the money to fund the company's operation as part of China's efforts
to claw back the funds.
China will confiscate assets to compensate for the cost of
unwinding the mess.
For example:
Evergrande's Ocean Flower Island tourism resort in Danzhou city on
Hainan island was worth more than CN¥160bn ($25bn). It has 39
nearly complete residential towers.
Those were originally ordered to be demolished because the company
had not followed environmental and zoning regulations. A former
official of the city was serving a life sentence for bribery.
Authorities in Danzhou city later decided to confiscate the 39
residential towers. The city will turn 16 of them into rented
housing, 4 into serviced apartments, and 19 into hotel and commercial
space.
The proceeds may eventually help offset the loss of the banks and
other parties.
The chairman and directors of Country Garden will have to give back
to the company in the form of interest-free loans too. They have to
sell their private jets and yachts and return the money to the
company to finish the apartments. So far, the founding family of
Country Garden had come up with $300 million to help fund the
company's operation.
The money thus recovered, and possibly with some government support
measures, will help provide for the construction and completion of
the apartments sold. It will take time and cause some pain to certain
parties involved.
In the month of November 2023, several major banks had doled out a
total of around $4 billion to help the smaller developers to continue
building and finishing the apartments sold. That's a small drop in
the bucket comparing to Evergrande's $300 billion liabilities.
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The apartments sold and paid for will be finished and delivered
one way or another.
With the clawed back wealth and some support from the government,
China will make sure the apartments projects will be finished and
delivered to the more than a million people in China are waiting for
their homes.
Evergrande group promised to complete and deliver 600,000 units or
50% of pre-sold homes within the year 2022.
In order to fund its operation and restructuring plan, Evergrande
sold two of its private Gulfstream jets for about $50 million and
then a Boeing private jet for another $100 million. Evergrande also
sold its luxury super-yacht for about $32 million in early 2023.
It also sold the land reserved to build its Shenzhen
headquarters for CN¥7.5bn ($1billion).
Those were held in escrow accounts for the construction of the
apartments. On top of that, Evergrande still has a total of
CN¥170bn of cash yet to be collected from sales.
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Apart from clawing back and confiscating assets of the instigators,
China will allow assets not under its direct jurisdiction to be
disposed according to local procedures and laws.
Evergrande has more than $300 billion in total liabilities, including
an offshore debt of around $32bn. It defaulted on its dollar bond in
late 2021. The majority of the money Evergrande owes is to creditors
in China, including ordinary homeowners, suppliers and banks.
Compared to its $31.7 billion in total offshore liabilities,
Evergrande has few assets outside of China. The sale of the
super-yacht and the private jets means foreign creditors of the
company will have fewer handles in any potential liquidation process.
Evergrande's offshore bondholders are alarmed by the shrinking of the
developer's offshore assets.
In September 2022, Evergrande's Hong Kong Headquarters and a plot of
rural land were seized by creditors. The property was valued at
HK$8-HK$9bn ($1-1.15bn) at the time.
The building was purchased for HK$12.5bn ($1.61bn) in 2015.
Two luxury homes of Evergrande's chairman in Hong Kong worth about
US$192m have been seized by a creditor.
Socialism with traditional Chinese characteristics
A bailout is totally against the ideology of China's leadership. In
fact, some argue that the government deliberately triggered Evergrande's
decline because the firm's success relied on an unsustainable bubble.
China's 'three red lines' financial regulatory guidelines, stipulated
that 'houses are for living in, not for speculation'. To China's
leaders, the painful but necessary measure was the only way to rein
in the ballooning debt and to stop relying on artificially high
levels of growth driven by the property Ponzi scheme.
Chinese regulator has to tread carefully and gingerly, especially
after the effects of the sweeping zero-Covid lock-downs. But it was
never going to be a painless process.
After a few years of careful management, when all the apartments
are built and delivered, those troubled conglomerates could
be dissolved or morphed into something else.
The exchange rate of the CN¥ may go down, which strangely does not
seem to affect China's inflation readout. The stock market may go
down. Emerging entrepreneurs may have difficulties raising capital.
But for really worthy projects, the state has enough capital and
resources to provide support. China seems to be able to tolerate
these possibilities comfortably.
The only problem that China has to watch out for is illegal capital
outflow and the collapse of the shadow banks and its consequences;
as the shadow banking giant Zhongzhi Enterprise Group with an
estimated CN¥360bn unrecoverable debt is now facing a criminal
probe.
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