Bad news, Beijing: Real-estate booms like the one in China nearly always end with a major banking crisis

• China's trying to manage its property crisis so the sector's troubles don't spill over.
• However, history shows that credit-fueled real-estate booms nearly always end with a major banking crisis, said an analyst.
• Real estate was a key driver of China's economy that has been struggling to recover post-pandemic.

China's trying to manage its real-estate crisis so that its troubles don't spill over to the rest of the economy, which has been struggling to recover post-pandemic.

However, history doesn't appear to be on its side.

"History shows that credit-fuelled real-estate booms do not end in a whimper; rather, they end with a bang — and nearly always with a major banking crisis," wrote Andrew Lawrence, the head of Asia property at GlobalData.TS Lombard, in a note on Tuesday.

China's real-estate crisis was long in the making. The sector started witnessing a decades-long real-estate boom in the late 1990s and grew so big that it — along with related industries — now contributes as much as 30% to the country's GDP.

But the market was so hot that Chinese developers were taking on a lot of debt to build apartments ahead of demand. Developers built so many apartments that one-fifth of the homes in China were empty.

Beijing tried to cool the market and managed to do so by introducing debt ratios for property developers in late 2020. The debt ratios worked — but the policy started sending the property sector into a crisis in 2021 when property giant Evergrande ran into a debt spiral. Other Chinese real-estate developers ran into similar issues, and the sector started to default on its bond payments.

"Their business models were only ever going to work until there was an interruption in their ability to borrow or generate sufficient pre-sales to meet their short-term liabilities," Lawrence wrote in his report. "For this reason, the end result is likely to be the same — default."

Since the beginning of 2020, at least 60 China property issuers with more than $140 billion in collective outstanding dollar bonds have defaulted, according to GlobalData.TS Lombard.

While China's property developers are restructuring their debt, the plans simply serve to kick the can of worms down the road because they have borrowed so much, are spending more than they are earning, and do not have much liquidity, wrote Lawrence.

The real-estate firms are unlikely to get a major reprieve from Beijing, as authorities continue to focus on managing the downturn in property prices debt defaults while trying to ensure that the sector's problems don't spill over into the broader financial system, added Lawrence.

Chinese leader Xi Jinping's administration is also focusing on affordable housing, the renovation of urban villages, and public infrastructure to spur employment and economic growth.

As real-estate firms continue to rely on bank financing, the country's lenders also face risk. A Chinese shadow bank with exposure to the property sector filed for bankruptcy just last week and a deterioration in credit conditions could trigger a knock-on impact on the banking sector, wrote Lawrence.

"This could cause solvency problems across China's over-borrowed corporate sector," he added.