China Evergrande Debt Crisis- Things to Know

The debt crisis at world’s most indebted property developer, China Evergrande Group, casted new light on the health of real estate market in China.

Key Points

• As per Rushi Advanced Institute of Finance, condominium prices in Shenzhen city are now 57 times greater than the average annual income and 55 times greater than the income in Beijing.
• Prices in China are much greater than the Japan’s bubble economy in 1990, when Tokyo condos were 18 times greater than the average annual income.
• Homes are beyond the reach of average households while investors fear President Xi Jinping could take measures to cool the bubble, especially in light of his “common prosperity campaign” that envisions a more equitable economy in which fruits of development are widely shared.

What are the concerns?

Such moves increase the risk of puncturing the bubble and trigger a downward spiral, making a soft-landing imperative. If this situation is mishandled; it could push the China into an economic downturn.

Red Lines in China

In 2020, People’s Bank of China had put out three “red lines” that major real estate developers needed to be careful about in terms of their financial status. Central bank sought to make it difficult for developers to increase leverage by forcing real estate companies to stay within a debt-to-asset ratio.

Common Prosperity campaign

In August 2021, China had launched a political campaign on the theme of “common prosperity”. It aims to tackle inequality in China. Major element of the inequality in China is the money that wealthy make through real estate speculation.

Month: Current Affairs - September, 2021