Evergrande and Real Estate Value Subjectivity

The historical political economy of Chinese housing regulation and price speculation.

“…In order to tackle the issue of housing price speculation, which was driving real estate firms to undertake dangerous levels of debt, China introduced the Three Red Lines policy. The policy declared that public real estate firms in China had to keep their liability-to-asset ratio below 70%, their debt-to-equity ratio less than 100%, and their cash-to-short term debt ratio less than 100%, which a number of large real estate developers failed to comply with (Goddard, 2022). However, the extent to which the Three Red Lines policy has cooled off the speculative bubble within the Chinese real estate market is contested amongst economists.…”

“…In order to fulfill the debt requirements, many real estate firms are beginning to shift their focus away from profit maximizing towards optimizing their balance sheets, which has caused land acquisitions rates to slow down -the effects of which are still yet to be observed fully (Chan, 2022). However, despite firms' focusing on rebalancing balance sheets, balance sheets within the real estate sector are continuing to deteriorate, as the percentage of defaulated real estate bonds increased from 6.7 billion Yuan in 2019 to 20.3 billion Yuan in 2020 (Goddard, 2022). Furthermore, in 2021 close to half of the 30 largest housing developers in China overstepped at least one of the three lines, while the percentage of defaulted loans reached a record high of 46.8 Billion Yuan (Chan, 2022), signaling that the policy is both unrealistic and impractical.…”

“…Prior to the introduction of the Three Red Line policy, Evergrande was the most leveraged real estate developer in China, with a gearing ratio more than double the next leveraged firms in the market (Jones, 2021). Currently, Evergrande has over 800 housing projects across China; however, as a result of the Three Red Lines policy, construction has recently ceased on 500 of those projects (Goddard, 2022). In 2020, Evergrande breached all three red lines by the fiscal year end, allowing the government to place restrictions on the company's growth aspirations to an extent to which the company is currently struggling under large amounts of debt incurred before the implementation of the policy (Kinder, 2022).…”