China’s real estate crisis after Evergrande collapse reveals dangers of shadow banking

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As the Chinese real estate behemoth Evergrande Group landed in a serious crisis, revealing the real hidden problems of the country’s property market driven by shadow banking, business ommunity across world is carefully watching the developments. A tumbling real estate sector in China could affect the world economy.</p>
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According to the <a href="https://icsin.org/blogs/2021/07/20/shadow-banking-and-the-real-estate-bubble-is-financial-crisis-a-real-possibility-in-china/">Institute of Chinese Studies</a> (ICS), China’s household debt in December last year was estimated at 150 per cent of its disposable income. This was also marked by a rise in property prices and seems to be concentrated among the millennials.</p>
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“There have been serious over-investments in several sectors in China, real estate being just one of the many. So, there are issues but since there is little transparency regarding data, it is difficult to assess the intensity of the problem,” Shakti Sinha, director, Atal Bihari Vajpayee Institute of Policy Research and International Studies, MS University earlier told India Narrative.</p>
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The Evergrande crisis has brought out a critical issue — the problem of high and unsustainable debt that several Chinese firms may be getting caught in at this juncture when the world economy is going through testing times amid the Covid 19 pandemic and shifting geopolitical contours.</p>
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China, which has remained focused on economic growth, has been witnessing a surge in its overall debt level—whether it is for local governments or corporates.</p>
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High credit has been a pillar for China’s economic growth. The ICS said the high credit borrowing has also put strain on financial institutions of the country. Besides, “zombie” companies that have little to no productive use, are borrowing more and more simply to meet their current obligations.</p>
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The ICS study also pointed out that several state-owned and private companies in China have property subsidiaries, and property loans made to these subsidiaries are sometimes presented in the books as going to the parent company. “This results in the share of property-related debt being much higher than what is available in the official data.”</p>
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Earlier, <a href="https://www.reuters.com/world/china/chinas-corporate-bond-defaults-touch-record-high-2021-07-09/">Reuters</a> reported that China's corporate bond defaults hit a record high this year, highlighting tightening credit conditions and a growing reluctance by regional governments to bail out troubled state-owned firms.</p>
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Chinese companies' bond defaults amounted to 62.59 billion yuan — $9.67 billion in the first half of the 2021, the highest ever, according to Fitch Ratings.</p>
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“That increasing proportion of defaults by state-owned enterprises (SOEs) has raised concerns among some investors that the end of implicit government guarantees on SOE debt could create market instability,” it said.</p>