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Will China throw a lifeline at real estate icon Evergrande to prevent a larger collapse?

Investors and home buyers anxious as Beijing remains quiet on Evergrande plans

Even as anxiety among global investors rises with the mammoth default of Chinese real estate major Evergrande Group, Beijing has kept mum on whether or not it would bailout the behemoth.

Sources familiar with the development said that Chinese authorities could possibly look at extending the repayment deadlines for a part of the pending outstanding dues even as the country’s banks and local governments have also been asked to prepare for the fall of Evergrande.

A foreign policy analyst added that Beijing's refusal to bailout Evergrande has a larger message to China’s private sector– that the government will not come to their rescue in case of defaults.

Also read: Desperate China now bans sharing of bad news which can keep foreign investors away

However, in this case, the problem for the Xi Jinping administration is that the real estate sector has shouldered China’s economy for years and is used as an effective savings instrument by lakhs of citizens.

“The authorities could look at providing some kind of lease of time to Evergrande. This will calm the nerves of the investors as well as home buyers,” an insider told India Narrative. He added that the extended timeline for repayment will also facilitate Evergrande in completion of the projects,” he added.

Real estate has always been a lucrative savings vehicle for the Chinese, especially as capital controls bar citizens’ to invest abroad.

So the Evergrande case cannot be compared with any other defaulting company as this would involve large amounts of savings of the common people.

Gan Li, of Chengdu’s Southwestern University of Finance and Economics told Bloomberg in 2018 that there was no other single country with such a high vacancy rate. “Should any crack emerge in the property market, the homes to be offloaded will hit China like a flood,” the news agency quoted Gan as saying.

Within weeks of Evergrande defaulting another Chinese real estate company Fantasia Holdings missed a $206 million bond payment deadline.

Also read: China's manufacturing output drops in September -power shortages maybe taking its toll

The Chinese real estate sector and its allied services account for about 30 per cent of the country’s gross domestic product (GDP). Besides, according to the latest data, about 29 per cent of all bank loans are directed towards housing.

“Cracks in the real estate sector in China have been showing up for many years but the government chose not to address the problems. Today the Evergrande problem is just the tip of the iceberg considering large chunk of bank lendings have also gone into the sector,” DK Srivastava, EY’s chief policy adviser told India Narrative.

“Any significant decline in real estate prices would lead not only to widespread disaffection, but also to a potentially significant pullback in consumption of other goods and services,” former chief economist of the International Monetary Fund Kenneth Roghoff, who is currently serving as Professor of Economics and Public Policy at Harvard University wrote in an article published by Financial Review.