Where Does Evergrande’s Default Leave Luxury?
What Happened: As the world’s most indebted real estate empire, China Evergrande Group now faces a slew of claims from companies owed money. Its default was called on December 9, and, since then, a Chinese court has been assigned to handle civil lawsuits against the beleaguered real estate empire: 367 claims totaling $13 billion (84 billion RMB). In the race to secure repayment against offshore bondholders, creditors have lost confidence in the property developer’s ability to pay off its obligations, which now total more than $300 billion. Evergrande is the owner of millions of apartments in hundreds of cities across China.
The Jing Take: Introduced against a backdrop of growing debt levels, rising land prices and booming sales, the Evergrande saga has been triggered by a tightening of government regulations on developers to curb debt and limit overbuilding. In China, the residential and commercial real estate market drives up to a third of the economy — and that segment is now at risk. The property bubble is a $60 trillion industry (four times the country’s GDP), accounting for about a quarter to a third of annual growth.
In terms of household wealth, homeownership represents roughly 80 percent in China. When house prices decline, the knock-on impact on household wealth alters consumption. This, combined with the ongoing impact of the pandemic, a dramatically aging population, and the country’s growing patriotism, have drastically changed domestic consumption patterns.
Moreover, the number of first-time homebuyers in the 25-39 age bracket should fall by one quarter over the next 20 years, dropping from $327 million to $247 million. And with fewer marriages, and fewer children too, household formations are sure to fall. So far, the default has been relatively low-key but should in time create massive reverberations, both at home and on global markets. While luxury may see an upturn in the short term, it needs to wait patiently and watch how the crisis unfolds.
The Jing Take reports on a piece of the leading news and presents our editorial team’s analysis of the key implications for the luxury industry. In the recurring column, we analyze everything from product drops and mergers to heated debate sprouting on Chinese social media.