The risks in the gigantic Chinese real estate sector continue to accumulate and are increasingly worrying the world. This week begins with bad news about it.
A number of companies listed on the Chinese stock exchange revealed on Monday the 14th that they did not receive payments for wealth management products from Zhongrong International Trust, a company that is part of the Zhongzhi Enterprise Group.
Zhongzhi Enterprise Group Co. is a financial conglomerate that manages about 1 trillion yuan, the equivalent of 138 billion US dollars. Although little known abroad, this Chinese corporation is one of the major players in the private finances of the Asian country. Its role is essential in aspects such as commercial and investment banking, private equity and wealth management. In addition, the conglomerate companies pool the savings of wealthy households and corporate clients to offer loans and invest in real estate, stocks, bonds and commodities.
Such is its relevance that as soon as the news broke through the market immediately, the Chinese banking regulator established a working group to examine the risks in Zhongzhi.
Some notes that emerged during the day indicate that the default affected just over 150,000 individual investors with a total of 230 billion yuanabout 31,000 million dollars, although it was not clear if effects on institutional investors were also reported.
In any case, the Chinese real estate crisis has invaded other spheres of economic activity in the Asian giant and it is not good news for anyone.
Specifically, the firms Zhongrong Trust and MinMetals Trust Co, belonging to the conglomerate, bought stakes in at least 10 real estate projects last year, betting that unfinished houses will eventually generate cash to pay for part of the 230 billion yuan in property-backed funds that they have issued to investors.
But the Chinese real estate market has slowed down, to such an extent that in the first half of the year Chinese banks registered a 7 percent drop in loans granted to the real estate sector, it was the first semi-annual drop since 2018, not even in the worst of the pandemic banks stopped lending to the real estate sector.
But Zhongzhi Enterprise Group Co., with everything and its relevance, is only a sample of the headaches that the real estate sector of the gigantic Asian nation has at the moment.
Another button is Country Garden Holdings, company that after failing to pay interest on two bonds in dollars and taking a 30-day grace period according to the lawexplained that it suspended the negotiation of 11 of its bonds in yuan and that it intends to renegotiate the payment plans with its investors.
The company tried to reassure the market by assuring that it would go ahead, possibly because the Chinese government wants to avoid a systemic crisis at any cost, but it is clear that there are problems in the sector.
The bank connection
Chinese banks are the largest financiers of the Chinese real estate sector, practically 8 out of 10 houses are financed with bank loans.
Among these banks are some of the largest in the world, which could infect the planet with risks in case the pressures on the real estate market in the country continue.
Among these banks are the Industrial and Commercial Bank of China (ICBC), with a capital of 210.710 million dollars; the China Construction Bank, which, as its name suggests, is totally focused on the real estate sector of its country. The institution has a capital of 157.250 million dollars. The Agricultural Bank of China also stands out, which apparently focuses on this sector in its country, but in such a gigantic nation in the countryside, housing is also required, and this bank has financed a good number of them in rural China. The banking institution has capital of 144.830 million dollars.
The Evergrande case, a costly crisis
Evergrande, the main real estate company in China, acknowledged in 2021 that it was in difficulty due to more than 300,000 million dollars of debt, which caused a serious crisis in the sector with international repercussions.
China averted the big crash by forcing the company into a debt restructuring process with the Chinese authorities themselves, which included at the time the sale of some of its founder’s personal assets.
One advantage China has is that, by controlling the country’s real estate market through state-owned banks, it knows which developers are likely to default, although it can’t prevent crises because notices can also catch them by surprise as it was. the case of this Monday, or try to hide the information so that it does not affect the market, but there is no shortage of those who disclose it.
It was crucial to the Chinese government that Evergrande’s day-to-day operations remained intact and they did, but what the cost was never fully known as the sole aim was to ensure the company could finish the houses it was building. so that common property buyers are not affected and confidence in the real estate market is not damaged. It is not clear if the Evergrande crisis was diluted or what we see today is a continuation of the same. What is a fact is that the risks for the world are growing.
whatChina’s real estate sector is too big to fail? Analysts are not sure, they know of the determination of the Chinese government and of its economic power to avoid any crisis at any cost, but even in China, the largest nationalized capitalist economy, the market is in charge, containing it could be even more expensive.
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