Back in September, China’s second largest real estate developer Evergrande gave the world flashbacks to the Lehman Brothers collapse and the onset of the 2008 housing crisis when they announced they were having cash flow issues and were in danger of default on upcoming interest payments on bonds they issued. Evergrande amassed debt in excess of $300 billion as they expanded their business from just residential development to electric vehicles, theme parks, and even owning one of China’s premier soccer teams.
Evergrande’s near default comes in the wake of increased regulations on borrowing for property developers and a decrease in demand for housing in China. Thus far, Evergrande has managed to meet payments by selling parts of their business and subsidiaries to raise cash. The company is by no means free from danger of default as they have new deadlines approaching for large debt payments. Evergrande’s near default set off a domino effect in China with many other sizable Chinese real estate developers either defaulting on debt payments or being in danger of doing so.
The real estate market accounts for approximately 30% of China’s GDP, and just over 40% of the Chinese banking system’s assets are tied to the real estate sector. The US Federal Reserve warned recently that the real estate crisis going on in China could easily have spill-over effects on the rest of the global economy. Chinese officials in Beijing have made it clear that they do not intend to bail out bondholders. Foreign investors are owed billions of dollars in bond payments and fear they will never be paid back in the case of default.
One potential plan that has received backlash in China would be to implement a nationwide property tax on residential real estate. While a nationwide property tax has long been resisted in China, the government hopes that this tax will help local governments with their overall goal of deleveraging. However, the government must be careful in calculating a property tax so that it does not lead to a sharp plunge in property prices past what is necessary to level out the playing field in the housing market.
Could this nationwide property tax be the answer to rapidly rising home prices in China and help to deflate the Chinese real estate bubble?
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