Marco Metzler of Switzerland gets 2,000 new followers a day on LinkedIn, all watching to see what will happen to his money. Metzler invested $50,000 last month in the offshore bonds of real estate developer China Evergrande Group to see if he would get any returns. The former Fitch Ratings analyst is not expecting much. He’s out to prove a point about China’s troubled property sector by chronicling the fate of his investment on social media.
“I was concerned about what was going on, and from my past I’m able to read rating reports and also to see what’s going on in the world in economics, and I felt obligated to speak out to the world and to warn about that situation,” Metzler told VOA. “We didn’t invest to get the money back, so I’m fully aware this will be lost.”
Evergrande has struggled since last year, when the Chinese government began clamping down on the country's property sector to rein in excessive debt and cap speculation.
Towering apartment blocks today extend far into the suburbs of major Chinese cities, but many flats are unoccupied, owned instead by absentee speculators and their banks. Evergrande Group, one of China’s biggest property developers by revenue, is now selling assets and may be staring down a massive restructuring to ease debt.
Companies or governments that invest in offshore bonds, and individuals who trade stocks listed outside mainland China and its $15.42 trillion economy, are coming to terms — albeit more quietly than Metzler — with the Chinese property crisis of 2021. These troubles are threatening bond returns, lowering some stock prices and could erode at least a quarter of the world’s second largest economy.
“I don’t think anyone debates the importance of the real estate market on the Chinese economy,” said James Macdonald, head of the property services firm Savills Research in Shanghai, who estimates real estate at 25% to 30% of China’s economy.
“If we do see a significant slowdown in the real estate market, it will have an impact in terms of domestic economic growth rates, and that could have a knock-on effect in terms of global economy,” Macdonald said.
As many analysts have noted, any major economic shocks that hit China, a country closely tied to the global manufacturing supply chain, and whose massive consumer base importers and exporters rely on, are inevitably felt around the world.
Property crisis: Evergrande and beyond
Evergrande is a bellwether firm that is more than $300 billion in debt. Hong Kong-listed shares in Evergrande have tumbled since February, though the developer averted default in October by paying interest on an overseas bond.
Another Chinese development giant, Kaisa Group Holdings, faces limited funding access and uncertainty over refinancing a “significant amount” of U.S.-dollar bond payments into next year “in light of ongoing capital-market volatility,” Fitch said in an e-mailed news release last month.
Smaller property developers are likely to rattle bond markets outside China because they are “less sound” than bigger ones, said Lillian Li, a vice president-senior credit officer at the Moody’s ratings service.
“We see that the offshore bond market has actually shown larger volatility than the domestic market in front of these regulatory crackdowns, including in the property sector,” Li said.
The Hang Seng Properties Index in Hong Kong, where foreigners are allowed to trade shares of Chinese companies, has lost about 1.2% year to date.
Municipal officials in some cities capped home purchase prices in September to deter speculators, further hobbling property momentum in China. The domestic property market could shrink by half a percent in 2022, Li said. Last month, prices for new as well as resale homes fell amid a fall in construction starts.
What happens next
Evergrande has offered its investors cash payment by installments as well as putting forth actual structures as repayment assets, the state-run China Daily news website says.
Central government officials hope to contain property speculation and leave property for people to occupy, the official Xinhua News Agency reports.
About $52 billion in Chinese property bonds will mature next year and $44 billion the following year, said Henry Chin, Asia Pacific research head with the real estate services firm CBRE. Other bond issuers will default, he forecasts.
No offshore investors want the bonds now, said Liang Kuo-yuan, president of the Taipei-based Yuanta-Polaris Research Institute, though he believes Taiwanese insurers and pension funds have invested in the past.
“Taiwan’s insurers more or less will buy high-yield and high-risk investment products, because the interest rates on policies they’ve sold in the past are too high,” Liang said.
Evergrande was once seen as the epitome of a Chinese property mainland market, Liang added. China’s real estate sector, the world’s largest, grew briskly from 2010 to 2018, says investment bank J.P. Morgan.
But not all is lost, some analysts say.
Investors in private equity for distressed debt could get a lift from China’s property spillover if companies look for new ways to repay debt, said Chin of CBRE. Some stock-buying vehicles have made money, too. Shares of the TAO-Invesco China Real Estate exchange-traded fund of Chinese stocks including Evergrande, for example, has grown 65% year to date.
But back in Switzerland, Metzler wrote on LinkedIn that Evergrande had “officially defaulted on overdue interest payments” and that his current company, DMSA, would file a bankruptcy case against the group. He calls China’s property market “a first domino” in a broader financial and economic crisis.
“The old system needs to come down before a new system will be established,” he told VOA.