Taps Coogan – October 22nd, 2021

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Wolf Richter, creator of the wonderful Wolf Street website, recently detailed the “mind boggling” real-estate bubble that is popping in China vis-à-vis the collapse of Evergrande and other over leveraged Chinese real-estate development firms.

From the sound of it, Mr. Richter can be placed in the ‘this is a systemic crisis’ camp with regards to Evergrande and China’s imploding real-estate bubble, noting:

“It’s mind boggling just how important the residential property sector is to the Chinese economy and to what extent government-dictated economic growth was achieved by building more apartment towers and it’s even more mind boggling how much debt residential property developers have racked up and how much household wealth is tied up in the property sector at multiple levels. And then there are the demographic headwinds that the property sector has been facing for years that are now coming to the forefront. So now there is a property crisis in China and it’s making the US mortgage crisis of 2008 look like child’s play in terms of magnitude…”

“The (Chinese) property sector is such a huge part of the overall economy and has been so important to economic growth that financial contagion is really the lessor problem. China’s residentially property market could be the largest in the world and has a total asset value of $62 trillion compared $34 trillion for the US property market… In the broadest sense, including the support industries… the property sector overall accounts for about 28%-30% of GDP according to numerous reports.”

“Chinese property developers such as Evergrande all together have $5.2 trillion of debt… $1.4 trillion are owed to apartment buyers that have bought unfinished apartments in pre-sales. This $1.4 trillion are essentially interest free loans from tens of millions of households to developers. If the developer collapses those households end up with a fraction of a construction site… Then there is the undisclosed off-balance sheet debt. Goldman Sachs estimated that Evergrande alone had $156 billion worth of off balance sheet and contingent liabilities…”

“So I did a little math. The average apartment size in China is said to be 60 square meters according to the internet and that’s 646 square feet… 1.6 million acres of floor space under construction at 646 square feet per apartment on average would mean that there are currently 108 million apartments under construction… when urban home ownership is already 90% and when the working age population has been shrinking for nearly a decade…” 

We couldn’t agree more. Assuming that Evergrande gets the bailout that everyone assumes is coming in some form or another, China is still left with a hole where the largest single driver of its command economy used to be.