December saw two major defaults among China’s debt laden developers with both Evergrande and Kaisa missing bond repayments totalling nearly $500m (£369.47m) between them. The plight of the property sector is now taking its toll on regional government finances though, with the Financial Times reporting local officials are increasingly searching for new ways to bring in revenue, including forcing local businesses to buy equipment from government designated suppliers. In the city of Shaoyang, in Hunan province, local officials have been auctioning off Evergrande projects in a bid to raise money. One official there told the FT: “Neither the government nor Evergrande has money… Someone else needs to fill the vacuum.”
Craig Botham, chief China+ economist at Pantheon Macroeconomics, said the reports from the ground were “what you’d expect”.
Speaking to Express.co.uk, he explained local governments had seen a key source of revenue “dry up” leaving few alternatives.
“Land sale revenues are about 40 percent or so of local government revenues, so they’re very reliant on land prices staying high.
“When property companies are failing, they don’t have the cash to bid in these auctions so a lot of these auctions have been failing.”
Although the Chinese central government has most of the tax power, local governments have most of the spending obligations.
Property currently comprises a disproportionate amount of China’s GDP at around 30 percent making the country highly sensitive to the industry.
While Evergrande has dominated headlines, many other firms are coming under pressure.
In a filing late on Wednesday to the Hong Kong stock exchange, R&F Properties said it would struggle to meet debt obligations as volatility in the property sector meant “proceeds from certain asset sales contemplated by the Group may fail to materialize.”
With many property companies trying to increase sales to raise revenue, prices have in turn been driven down.
Mr Botham explained companies typically used both debt and pre-sales – homes sold before completion of construction – to finance themselves.
With the government increasing restrictions on company debt levels though, pre-sales have become more and more important with Evergrande providing discounts of as much as 20 percent to drive sales.
This, however, has put pressure on other developers to lower their prices to remain competitive.
A key part of China’s property woes stem from actions by the government itself which introduced a crack down on debt in 2020 known as the ‘three red lines’.
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The measures have put strict limits on debt ratios for companies in an attempt to wean them off their reliance.
But it has proved tricky for the property industry which has relied heavily on debt financing.
China has made various interventions in the property industry in the past, sometimes scaling back when needed.
Mr Botham said Beijing seemed “more committed” to the regulation than ever before, suggesting there is “more political capital invested”.
He believes the Chinese government may fear a future market correction if it doesn’t act now – and would likely prefer a “controlled demolition” on their terms.
A 2022 outlook report by global ratings agency S&P also predicted reforms would likely continue with more defaults in the property sector expected.