ChinaTalk What Evergrande Means for China
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Sep 24, 2021 Logan Wright, an analyst at Rhodium Group specializing in the Chinese economy and real estate market, shares his insights on the Evergrande crisis and its implications for China's financial stability. He discusses the challenges faced by the property developer, the tightening regulations impacting the sector, and the broader economic ramifications. Wright also examines China's financial reforms amid rising credit risks and the long-term effects on global markets, emphasizing the urgent need for a strategic shift in the country's economic approach.
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Evergrande's Debt Crisis
- Evergrande's troubles stem from new financing controls (the "three red lines") imposed on China's property developers.
- These regulations restrict borrowing based on debt ratios, highlighting Evergrande's massive debt.
Artificial Demand in China's Property Market
- China's property market correction in 2014-2015 should have been the peak, but the Shantytown Redevelopment Program artificially stimulated demand.
- This program, involving relocating residents and demolishing houses for cash compensation, fueled further speculation and price increases.
Pre-sales Financing and Inventory Issues
- Despite slowing credit growth, developers relied on pre-construction sales to offset financing losses during the deleveraging campaign.
- This practice, where buyers pay 100% upfront, further exacerbates the inventory problem.