A line of 60 uniformed security guards stretched across the entrance to ailing Chinese property giant Evergrande’s gleaming Shenzhen tower on Monday as dozens of angry investors demanded answers – and their money – from the company.
The protesters, who claimed they had been “swindled”, represent just a fraction of an estimated 1.5m people who pumped cash into Evergrande to buy apartments which have yet to be built – and may never be.
Evergrande, founded in 1996 by the well-connected billionaire Xu Jiayin, rode an urban property boom now running out of steam and is teetering under a $300bn debt burden. The firm was forced to deny an imminent bankruptcy but ratings agencies predict a default, while domestic banks and foreign creditors are on the hook, prompting fears of a "Lehman moment" for the world’s second-biggest economy.
“Right now, there are an awful lot of people in China paying for a property from a company that looks like it's going down the plughole,” says Mark Williams, chief Asia economist at Capital Economics.
While Evergrande’s crisis has grabbed the headlines, the ingredients of a Chinese property bust have been long in the making. As far back as 2016, Chinese president Xi Jinping warned of a potential crackdown with the phrase that “property is for living in, not for speculation”.
That message belies the wall-to-wall billboards, television and even elevator advertising luring buyers to put their cash into property, a portrayed sure option in an under-developed financial market offering relatively few alternatives for investment. Amid higher savings rates and a population that has lived through an economic boom, cash-buying real estate years in advance is common and owning properties – the more the better – is a status symbol.
Iris Pang, ING’s chief economist for China, says: “It is a culture deep in the mind of the Chinese, if not all Asians. Look at Hong Kong, look at Macau. Singapore is a little bit different because they have a very generous public housing policy. But across Asia home ownership is a kind of self recognition, a safety net for people's life or retirement.”
Strong demand has left average Chinese house prices at an eye-watering 18 times average incomes in a private property market which did not even exist until the eve of the millennium. But this has also been fuelled by Beijing regularly turning to property investment, a sector accounting directly for around 15pc of China’s economy, as a short-term fillip to growth during periods of economic turbulence. Companies have leveraged up with the blessing of the government.
Despite vacancy rates of over 20pc, the tendency to overbuild in a country of party officials eager to show rapid regional growth – and gain their next promotion – is also behind the phenomenon of “ghost cities”: urban areas filled with half-finished concrete shells.
The deleveraging drive was slowed down by trade war, and then by the pandemic. Last year it gathered pace with Beijing’s publication of the “three red lines” for developers, imposing strict new limits on liabilities as a share of assets, gearing of less than 100pc and enough cash to cover short-term debts.
Only a fraction of domestic developers, or just 6pc, complied with the rules at the beginning of 2021, according to ratings agency Standard & Poor’s. Meanwhile this year authorities have stepped up efforts to rein in housing prices with measures such as restrictions on home purchases and higher mortgage rates.
The move to rein in Evergrande and its peers will only add to downward pressure, all while the Communist leadership keeps an eye on social cohesion and a worsening demographic crisis.
China’s population grew at the slowest rate since the Fifties in the decade to 2020, according to the latest official census published earlier this year. Meanwhile, the legacy of a rapid economic development and a one-child policy that was abandoned in 2016, means that by 2050 the country is likely to have one retiree for every two workers, compared with a one-in-ten dependency ratio in 2000.