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As Shimao Group shares plunged as Beijing assessed what to do with Evergrande, house prices, sales, and construction which all fell in November

While state-owned enterprises began carving up the carcass of the failing property giant Evergrande in the past month, China’s giant housing market has continued to crash and another major developer showed signs of financial distress.

Renewed signs of the crisis in the market, which accounts for up to 30% of the country’s output and which appears certain to drag on the world’s second-biggest economy, showed uniformly by the house prices, sales, investment, and construction data released on December 15 that a crash is looming.

The data was released days after shares in Shimao Group, one of China’s largest developers, fell 20% on concerns that it was offloading assets to manage its spiraling debts.

Based on Reuters’ calculations, new home prices fell 0.3% month-on-month in November, the biggest decline since February 2015. That drop proved to be worse than the 0.2% drop in October. Among the 70 cities tracked by the Chinese statistics bureau, only nine saw monthly price gains in November, the fewest since February 2015.

Official data showed that the actual value of home sales tumbled by 16.31% in what was a fifth straight month of decline. In November, new construction starts as measured by floor area fell 21.03% on the year, down for the eighth month, while property investment by developers fell by about 4.3%.

The director of Shanghai-based E-house China Research and Development Institution, Yan Yuejin, stated:

“Cities of all classes are under pressure. The current scale of market supply is large and demand is weak. The key is to accelerate inventory de-stocking to stabilize home prices.”

However, weak demand for houses was in line with other metrics across the whole Chinese economy, as highlighted in the data released on Wednesday.

Real retail sales gave the weakest outcome since August 2021 as they increased by just 0.5% on an annual basis, down from 1.9% in October, and far below pre-Covid levels as consumers remained cautious and Covid outbreaks continued to cause snap lockdowns.

Compared to the previous year, passenger traffic data suggested that people were not traveling and spending as much, and sales had slowed during the annual November 1-11 shopping festival – China’s answer to the US “Black Friday” consumer shopping spree.

Economists said that despite industrial output picking up last month after power shortages eased from the previous months, the overall picture was becoming more unfavorable. In November, there was little sign of improvement in underlying economic conditions, as explained by Gerard Burg of Westpac in Australia. That scenario was cutting the bank’s forecast for China’s economy. He mentioned:

“Overall, growth in industrial production was only marginally stronger, investment trends remained extremely weak, and retail sales data point to minimal consumption growth.”

To boost the struggling economy, China unveiled a package of measures earlier this month including freeing up banks to lend more money to targeted businesses.

The central bank is expected by many economists to reduce the main interest rate from its current 3.85% – very high compared with every major western economy – and in the New Year, more fiscal measures to boost economic activity are also seen as likely.

However, last week in the wake of the default of China Evergrande, once the country’s second-biggest property developer, the crisis engulfing the property market looms over the economy. When it failed to come up with $82mln owed to offshore creditors, it finally succumbed to its $300bn debt mountain and analysts have said a huge restructuring effort is now underway.

The government sent a working party to Guangdong, Evergrande’s home province, which had arrived at the company’s headquarters in order to start work on carving up the once-all conquering empire built by former steel executive Xu Jiayin.

Representatives of state-owned monoliths such as Guangdong Holdings and the government-owned investment bank, China Cinda Asset Management, make up the working party.

As the state seems set to absorb Evergrande’s debts and to carry out the huge task of delivering around 1.6m as-yet-unfinished homes to buyers who have already paid upfront for the properties, however, the developers that were previously thought secure are running into financial trouble.

After it sold assets between different parts of the company and canceled apartment sales, shares in Shimao Group, which was one of China’s top-10 developers last year and investment grade-rated until a month ago, fell a record 20% on December 14.

Its bonds also dropped in price and is a reflection of the risk to investors of lending money to the company as the yields rocketed. Since early 2017, a Bloomberg index of property developer stocks in China fell to its lowest, and shares in Evergrande fell almost 10% to a record low.

In November, S&P warned in a report that due to the weak demand for housing and the crackdown by Xi Jinping’s government on what it regards as the industry’s reckless “borrow and build” model, up to one-third of Chinese developers could experience financial distress in the next 12 months.