China's Real Estate Sector Is Still Imploding

While the world's attention has been drawn to Eastern Europe recently, we should not forget that China's real estate sector, and in particular the heavily indebted developers such as Evergrande, are continuing to implode.

Evergrande said in a stock exchange filing that due to "drastic changes" in its operations since the second half of last year, the auditor has added a large number of additional audit procedures.

The developer will publish the audited annual results "as soon as practicable" after the audit procedures have been completed, it said.

The Evergrande saga is merely the public face of China's real estate woes, which began when Xi Jinping began serious efforts in the past year to deflate the real estate bubble.

Mr. Xi’s efforts to tame a market that has been in an extended boom for four decades has already sent shock waves across the Chinese economy and global markets. He has shown little mercy to China Evergrande Group, even as the heavily indebted property developer teeters on default. Other private developers that have binged on debt are also being squeezed. Home sales are falling and banks are pulling back on new lending. The impact from property tightening contributed to a sharp slowing in China’s growth in the third quarter.

A chief problem for Xi is that the average Chinese household has its wealth tied up in real estate.

Chinese households are restricted from investing abroad, and domestic bank deposits offer low returns. Many people are wary of the country’s boom-and-bust stock markets. So some have poured money into housing, in some cases buying three or four units without any intention of living in them or renting them out.

Deflating the property bubble necessarily means a significant amount of wealth destruction--never a recipe for social order and tranquility.

Xi's problem is China's property bubble is now deflating on its own terms, and on its own timetable.