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China’s economy could be dragged down by loss of confidence in the real estate sector

Loss of confidence in China’s real estate sector could fuel contagion that would further dampen China’s economy, analysts have warned.

Comments come after embattled developer China Evergrande Group failed to deliver a promised $300 billion restructuring plan over the weekend.

In documents filed with the Hong Kong stock exchange, Evergrande instead said it had put in place “preliminary principles” for the restructuring of its offshore debt. It also stated that one of its subsidiaries, Evergrande Group (Nanchang), had been ordered to pay an anonymous guarantor 7.3 billion yuan ($1.08 billion) for failing to honor its debts.

“For the government, the priority is to break the negative feedback loop that characterizes the high debt ratio and the shortage of liquidity from developers,” said Shuang Ding, Standard Chartered’s chief economist for Greater China. and North Asia, on CNBC’s “Street.” Sign Asia.”

“That leads to a mortgage boycott and very low buyer appetite, and that comes down to the developer as low sales affect their liquidity.”

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China faces mortgage repayment revoltlandlords in 22 cities refusing to repay loans for unfinished housing projects.

“So if this problem is not handled properly, it will have a profound impact on the economy, including the government’s balance sheet, the bank’s balance sheet as well as households,” Ding said.

Ding said the problems in China’s real estate sector threaten a crucial foundation of a strong economy: market confidence.

Land sales, which constitute a predominant part of the provincial government’s revenue, have fallen by 30% over the past year.

The economist said Beijing should identify problems in the real estate sector and deal with them holistically, rather than with a piecemeal approach., in order to avoid mass insolvencies.

Dan Wang, Hang Seng Bank’s chief China economist, said the government could achieve this by ensuring struggling companies have enough money to finish building half-started houses or complete a building. project sold.

Last week, China’s political bureau signaled that the country could miss its 5.5% GDP growth target for the year, as new data showed Chinese factory activity contracted unexpectedly in July after rebounding from Covid-19 lockdowns in June.

While Beijing takes the crisis in the housing sector seriously, the Evergrande crisis is unlikely to be resolved anytime soon, and never at all, said Sandra Chow, co-director of Asia-Pacific research at CreditSights.

“I think it will take a long time for investors to have confidence not just in Evergrande, but in the Chinese real estate industry as a whole,” Chow said.

“The Chinese real estate market is struggling, despite all the easing measures, and asset values ​​continue to fall, especially in lower-tier regions as well. So it will be very difficult to restore confidence.”

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