In 2020, President Xi Jinping announced limits on the volume of debt that companies like Evergrande could accumulate. Companies’ debt could not exceed 70% of their assets; total debt should be 100% below its market value and financial reserves should remain at 100% of short-term debt.
The restrictions, called the “Three Red Lines”, showed that the developer was operating in an unsustainable manner. At the time, Evergrande already had more than US$300 billion in liabilities, that is, expenses and debts. For years, the developer has been financing ongoing construction projects with customer deposits for future real estate initiatives. Much of the $300 billion owed by Evergrande concerned deposits paid by ordinary Chinese citizens to purchase newly built apartments. It is not defined whether local buyers will be prioritized in the face of a possible liquidation to foreign creditors.
The lack of payments collapsed the Chinese property market and dealt a blow to the country’s economy.
How important is the real estate sector to China
The real estate sector is decisive for China, with growth that has been in the tens for many years. In comparison, in 2023 the economy only grew 5.3%, partly due to falling exports and domestic demand, high youth unemployment and a worsening housing crisis. China is a country of property owners: around 80% of families own their own home, and more than 20% of those living in urban areas own more than one property.
Nos In recent years, several Chinese property developers have been forced into bankruptcy, while investment by construction firms has fallen by 10% for two successive years. In 2023, new home sales from the top 100 real estate companies shrank by more than a third to 451.3 billion yuan ($64 billion). Local governments, whose budgets depend on the sale of land for real estate, are also seriously in debt and forced to cut spending.