Evergrande: China’s version of the 2007 Wall Street Collapse?

Evergrande is one of China’s largest real estate developers and the largest builders of apartments, office towers, and shopping malls. The company, based in the southern hub Shenzhen, says it has more than 200,000 employees, as well as some 1,300 projects in more than 280 Chinese cities. Since being founded in the 1960s, it has sold millions of apartments and building complexes to China’s growing middle class.

Today it is the world’s most indebted developer having amassed over $300 billion in debt, equivalent to about 2 percent of China’s gross domestic product. So what exactly happened? What went wrong? Most analysts describe this Evergande crisis as something similar to the American Lehman Brothers banking crisis in 2007-2008 causing the bank to default. In China, between the years 2005-2009, there was a boom in demand for property as more people were lifted out of poverty and Evergrande was able to emerge at the top. In most circumstances, people were so eager to buy their housing that they did not wait till the property was completed and ended up buying presold underdeveloped houses. This allowed Evergrande to make large yet unsubstantiated profits.

However, post-2009, there was a gradual decline in the demand for property such as apartments and housing in general. In order to sell more, Evergrande began to diversify aggressively. It increased its debt to finance its ambitious ventures in the tourism, automotive, entertainment, music, and media industries. Eventually, as of 2021, Evergrande had accumulated over 300 billion USD in liabilities and had to pay that amount back. Over the last few weeks leading to 21 September 2021, it warned its investors of its cash flow problem, explaining further that it could default if it was unable to raise capital quickly. In a stock exchange filing, it also disclosed that it was having trouble selling some of its assets. The company even managed to avoid a 13 billion dollar cash crunch last year. In order to raise money, Evergrande has been slashing property prices and offloading on to its other businesses.

Unfortunately, Evergrande is one of the businesses that are too big to fail. If it collapses, its ripple effects would be felt through China, Hong Kong and even America. Evergrande directly employs about 200,000 people and it is also responsible for indirectly generating and sustaining 3.8 million jobs each year through its transactions and dealings with other businesses. On 4 January 2021, it traded at HKD 14.1 or USD 1.8, and its price per share plummeted to HKD 2.6 or USD 0.3 by 16 September 2021. Rating companies downgraded their credit rating earlier in September 2021 due to their liquidity issues and a probable default. The drop in the US stock market also impacted cryptocurrency. Bitcoin dropped by nearly 5.7%. There is also a potential impact on the Chinese financial system. The company owes money to around 171 domestic banks and 121 other financial institutions. Failure to settle its interest payments or defaulting to its entire liabilities would reduce the lending capabilities of these institutions, thus resulting in a credit crunch and reduced public access to loan The people to who these apartments were pre-sold will also be severely impacted unless the government bails Evergrande out.

While China has previously bailed out other large companies on the verge of a total collapse, under Xi Jinping, this policy is taking a radical shift. That is reflected in Chinese leader Xi Jinping’s common prosperity campaign to address the country’s wealth gap, which includes everything from affordable housing to curbing video game usage among young children. Xi has also expressed a desire for economic expansion to be driven more by “high-quality” growth such as consumption and exports and less by empty apartments. Therefore, a complete bailout would be highly unlikely at this point in time. China has advised financial institutions to save the company from the brink of collapse through capital infusion, whereby funds are injected into Evergrande by interested investors to prevent a potential collapse. An estimate of 19 billion has been estimated so far in order to revive the company. Moreover, American banks like HSBC and Blackrock are some of the largest buyers of the debt ridden offshore Evergrande bonds.

China might need to reconsider it’s approach and implement more viable legislation and regulation in the already over-heated real estate industry. Evergrande cannot come out of this alone and must be handed money in order to revive itself. Over 1.4 million Chinese residents across 280 cities are waiting on their housing, 200,000 people depend on it for their jobs and Evergrande does contribute a lot to the Chinese economy. But when we introspect we realize that this problem isn’t merely limited to Evergrande , it’s all of China. Evergrande’s debt is 2% of the Chinese annual GDP and 10% of it’s Forex holdings. How long can China sustain it’s overheated economy? How long can China continue to prioritise economic growth over necessary financial regulations without experiencing its downfalls? And most importantly, can Xi Jinping really stabilise Evergrande without putting the Chinese and global economy in danger?