The fuss around Evergrande seems to be dying down, so now seems as good a time as any to reflect on what happened and try to put it all in perspective.
The catalyst for Evergrande’s woes was China’s ‘three red lines’ policy. This is aimed at a forced de-leveraging to improve the health of the real estate sector, levels of debt having been a concern for years. The red lines are: liability to asset ratio of less than 70%, net gearing ratio of less than 100% and cash to short term debt ratios of more than 1x. Breaching all three means that permissible debt growth allowed in a year falls to zero.
The issue for Evergrande is one of sheer scale, because it is indeed a very large developer, ‘the biggest in the world’, heavily leveraged and thus viewed by some as systemically important and as such too big to fail. It’s worth noting that it’s just one developer out of 50 other developers in China which are bigger than the biggest developer in the United States. Arguably then, there is a lot to be worried about. So, as a market observer, are you worried about the impact of government policy on what is a clearly gargantuan property market in China or are you secretly quite happy that the authorities have imposed a regulatory clamp-down to bring greater order to the property market?
Let’s have a look at what some of the experts have to say.
Real Estate Foresight conducts market research and risk monitoring of the China property market. In a recent report, it said that growth of sales value for the 20 major developers is around 15% up year-on-year, whereas Evergrande’s sales volume is over 20% down, perhaps as one would expect, given its struggles, but the point is this: Evergrande is an outlier and does not represent the norm among its peers. It’s also worth bearing in mind that its projects are distributed across many cities, rather than concentrated in a few, which should lessen the negative impact of disposals.