According to NetEase, just two weeks ago, Shihua Real Estate Investment Consultant Limited Company, one of the three largest real estate brokerage firms in Shenzhen city, Guangdong province, issued an internal notice, saying that, of the top 50 real estate developers in China and also their partners, two-thirds are about to go bankrupt. It is not because they can’t pay their debts, but because the funds are about to break. What does that mean? Whether it is from a financial perspective or from a market perspective, the real estate market has entered an irreversible recession.
Sina reported that at the end of August this year, Lanzhou Urban Development Investment Company had a “technical default” that caused concern and attracted investors’ attention. According to Baidu, the Urban Development Investment Company, is the government’s financial investment platform in China’s major cities. Since 1991, it has assumed the corresponding government function, and is a special market operator.
China News Center said that most companies investing in urban areas are now unable to make profits. They receive 100% state capital backing, they achieve profits through government subsidies, through a special government market regulator. According to Zhihu, the default of Lanzhou is a nonstandard return guaranteed by the Lanzhou city investment platform.
According to NetEase, city investment is the largest source of local government revenue. In 2013, the total public debt of all local companies across China was about 2.1 trillion yuan ($291.59 billion), but by 2022, nine years later, the total debt has become 13.74 trillion yuan ($1.91 trillion). The breach of contract by Lanzhou was only the first step, followed by default after default. So the question is: Where has so much of the investment money gone? Was it all used to buy land? Buying land for what exactly? With a real estate company to develop real estate?
NetEase said that in 2021, Evergrande Group, the second largest real estate developer in China, collapsed, and the entire real estate industry entered a stagnat phase. And Evergrande has just over 2 trillion yuan in debt and 500 billion in annual sales, so its debt ratio is 400%. But do you know how high the debt ratio is of municipal investment firms all across China—700%！Each year they only pay the interest on more than 700 billion yuan. So, once this explosion occurs, how destructive will it be? It will be ten times bigger than the entire real estate market!
The newspaper also pointed out that if one wants to be in the real estate business in China, one should quickly examine all industries related to the urbanization industrial chain, and learn more deeply about the business model and its transformation. Thus, don’t expect real estate sector to bounce back like the past few times and witness another miraculous, strong rally. After all, times have changed. The industrial cycle has changed, and the dividends brought about by globalization have disappeared and the “zero-COVID” policy continues.
According to China News Center, citing an expert, urban investment companies across the country have borrowed money to buy land in recent years, along with real estate companies developing real estate. The default of the Lanzhou Urban Investment Company was just the beginning.