Beijing Plans To Turn Its Debt-Ridden Property Giants Into State-Owned Entities, Expert Says

The logo of China Evergrande Group is seen on the property developer's headquarters in Shenzhen, Guangdong province, China, on Sept. 26, 2021. (Aly Song/Reuters)
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By Jenny Li

New Analysis

After two major Chinese property developers—Evergrande and Kaisa—defaulted on their bond payments, the Chinese Communist Party (CCP) reiterated its bid to rein in its debt-ridden property market. However, experts believe that the CCP intends to turn private enterprises into state-owned entities that bolster state control.

The real estate sector was one of the concerned topics discussed at China’s annual Central Economic Work Conference on Dec. 10, a key meeting where the heads of the regime mapped out economic agendas for 2022.

At the meeting, China’s National Development and Reform Commission deputy director Ning Jizhe emphasized the need to reform its debt-ridden real estate sector, calling it a significant economic pillar of China.

Since the beginning of 2021, Chinese real estate giants including Evergrande, Fantasia, and Kaisa have fallen into a debt crisis, and China’s “Three Red Lines Policy” has worsened the problem. The three red lines are a series of debt thresholds, severely restricting the borrowing capacity of some real estate developers.

The People’s Bank of China and the Ministry of Housing introduced the Three Red Lines Policy in August 2020, aiming at improving the financial health of the real estate sector by reducing developers’ leverage, improving debt coverage, and increasing liquidity. However, some major property developers such as Evergrande had failed to meet the new regulation.

Chinese economist Huang Jun told The Epoch Times that the primary reason for Evergrande’s collapse was that the state-owned banks stopped lending, knowing that Evergrande had issued bonds with very high-interest rates, which it could not repay.

Huang Jun is the chief economist of the China Enterprise Capital Alliance (CECU) and a member of the Asian Real Estate Association’s (ASEA) research committee. He currently resides in the United States.

“Beijing likely played a role in Evergrande’s collapse,” Huang explained. “Since the housing reform in 1998, China’s private real estate enterprises have grown large. But the CCP wants to regain control by turning private enterprises into state-owned.”

Huang mentioned the CCP’s long-standing economic philosophy, “the state enterprises advance, the private sector retreats,” a principle that suppresses the free-market economy and bolsters state control. Since the early 2000s, the CCP has promoted the dominance of state-owned enterprises at the expense of the private sector.

On Dec. 6, the Evergrande Group established a seven-seat risk management committee that included four state entity officials, according to the Financial Times. The move was equivalent to the government intervening in Evergrande’s debt restructuring.

“The [committee] will take over Evergrande and find third parties, especially state-owned developers, to take over its development projects,” said Chen Long at Plenum, a Beijing-based consultancy. “After that, Evergrande is done. Original shareholders, including [its founder and chairman] Xu Jiayin, will be wiped out.”

“This is how Beijing has managed highly indebted companies over the past three to four years,” Chen added. “There were multiple times they could have saved Evergrande. They could still save Evergrande today. But there is no political motivation for anyone to do that.”

Huang pointed out that the CCP will never give up on the real estate industry as long as the central and local governments can profit. The soaring housing prices and people’s livelihoods have never been the CCP’s primary concern.

“When the [Chinese] government slowly takes full control of Evergrande, it will start reiterating the importance of the real estate industry and calling it a major economic pillar,” Huang added.

“The real estate market is the core component of China’s economic development. China’s investment in real estate and infrastructure projects accounts for 25 to 30 percent of the country’s GDP. It has always hoped the real estate market will continue to rise and harvest the wealth of ordinary people.”

However, the debt crisis of Chinese property giants has undermined global confidence in the Chinese market and deterred foreign investors.

On Dec. 9, Fitch Ratings declared China Evergrande Group and Kaisa Group Holdings as “restricted default” after missing U.S. dollar bond payments.

As the cash crunch spread, other Chinese developers also started showing signs of strain. Failures to repay investors are piling up in China’s property sector, as real-estate companies buckle under the stress of falling home sales, government curbs on borrowing, and a bond-market selloff that has all but shut the market for new deals.

Ellen Wan contributed to this report.

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