Evergrande s unraveling is still receiving global attention, but its troubles are part of a much bigger problem.
For weeks, the ailing Chinese real estate conglomerate has made headlines as investors wait to see what will happen to its huge debt As the slow-moving crisis unfolds, analysts are pointing towards a deeper underlying issue: China's property market is cooling off after years of oversupply.
Since some time, warning signs are flashing. Prior to Evergrande's meltdown, tens of millions of apartment buildings were thought to be empty across the country. The problem has only gotten worse in recent years.
The demand for residential properties in China is on the verge of a sustained decline, according to one economist.
Mark Williams, chief Asia economist of Capital Economics, estimates that China still has about 30 million unsold properties which could house 80 million people. On top of that, about 100 million people have likely been occupied but not bought, which can accommodate roughly 260 million people, according to Capital Economics estimates. Such projects have dubbed China's ghost towns for years, and dubbed as being a dream town. How were some of those projects started and how the problem came about originally?
Real estate and related sectors are a massive part of the China economy, accounting for as much as 30% of GDP. The proportion of the economic output related to construction and adjacent activities is far higher than in other major economies, according to Williams.
For decades, that has helped the country sustain rapid economic growth.
But for years, critics have questioned whether that engine of growth was creating a ticking time bomb for the world's second largest economy. That's in part because of the massive debt many developers took on to finance their projects.
As China's most indebted developer, Evergrande became the poster child of unsustainable growth, with more than $300 billion worth of liabilities.
In a recent report, Zhu wrote that 12 Chinese real estate companies defaulted on bond payments totaling about 19.2 billion yuan nearly $3 billion in the first half of the year.
This accounted for near 20 % of the total corporate bond defaults in the first six months of the year, the highest across all sectors in mainland China, she added.
The pandemic forced activity to a temporary standstill. But construction later roared back to life as China reopened and the country's property market enjoyed a brief rebound.
However, since then the market has sputtered again. In the last few months, Zhu has seen an important change in measures of price growth, housing construction starts and sales, which tapered considerably. The sales of property after sold by floor space dropped 18% in August compared to the same time the previous year, adds Melvin.
China is entering an era of sustained decline, Williams wrote in a research note. He called this root of Evergrande's troubles — and the ones of other highly reliable developers. Then there is the problem of unfinished projects, even if there is demand. The majority of new properties are completed before being sold in China — about 90% ; any setbacks for home builders will affect buyers, according to economists.
This gives the authorities a strong incentive to make certain that existing projects continue as successful developers are restructured, said Williams.
While it did not specifically refer to Evergrande, the central bank has been pumping cash into the financial system recently to help stabilize the situation and calm nerves.
A word about 'dare": Some companies are in dire straits. If many players are clearly struggling, some developers are not in a hurry to default, according to Julian Evans-Pritchard, a senior China economist at Capital Economics.
With a couple of exceptions, most major developers are much stronger than Evergrande and should be able to weather a temporary spike in their borrowing costs amid contagion fears, he said in a note to clients. That should be some support amid the current market jitters, at least in the short term, he added.
But in the long run, it can matter little.
The structural decline in housing demand will become more difficult over the coming decade, wrote Evans-Pritchard. A inevitable consolidation of the sector over many years seems more likely than a long term wave of developer failures.