The Evergrande Crisis: What China Can Do to Prevent a Financial Meltdown owes more than $325bn

The Evergrande Crisis: What China Can Do to Prevent a Financial Meltdown owes more than $325bn

The Evergrande Crisis owes more than $325bn

Unraveling the Evergrande Crisis: China’s $325bn Dilemma and the Path to Financial Stability! Discover the crucial steps to avert a meltdown. Dive in now

Evergrande, a Chinese property developer, has over due credit of 325 billion dollars. It’s greater than Russia’s whole national debt.

The company has been stumbling one crisis after another for almost two years already unable to pay off their huge debt worth billions of dollars.

Its owner is now under observation by the police; its papers are almost valueless and over one million Chinese people are yet to be provided with houses. A court in Hong Kong could start another chapter on the turmoil next Monday by directing for some Evergrande assets’ liquidation to pay off disgusted foreign investors.

Evergrande is now a popular symbol for the failed real estate industry in China. Country garden is among a group of major real estate developers whose name has been synonymous with unsustainable debt and near-financial collapse. Yet, Evergrande clings to survival.

Typically, a privately owned and operated company like Evergrande would get closed down in most Western States with rare exception where governments step in to save the situation. However, this is not the case with the Chinese.

READ MORE Evergrande Shares Slide 25% this weak as Mainland Unit Misses Debt Payment

China’s, which happens to be the world’s next large economy cannot, however, be tagged as capitalist or communist. It’s a unique problem—which means no one knows what’s going to happen to Evergrande.

However for the time being, China has relaxed pressure of the corporation through actions that other states won’t take.

“It is alive only because the government has not allowed it to die,” Leland Miller, the CEO of China Beige Book, a data analytics platform tracking the Chinese marketplace.

Crypt mode

Different from the Western countries, Chinese market is not an open one. According to Mr Miller in case it happens, the state only needs to tide over the money until a hole is patched up again.

Most of the money that Evergrande owes is to Chinese creditors such as common home owners, suppliers and banks.6 The main reason for this is the government’s control of them which can be used to explain why the company is a zombie.

Evergrande has over 1,300 projects in more than 280 cities in China
Evergrande has over 1,300 projects in more than 280 cities in China

According to Dexter Roberts who is a senior fellow of the Atlantic council, “The banking system in China is almost entirely state owned”. Hence, if Beijing instructs those banks for finding some means to reschedule the debt, they will have no choice but to comply with them. At the end of the day they understand very clearly where their supreme authority lies.

Mr Miller agrees: “‘China’s state may order lenders to lend, suppliers to supply, borrowers to borrow. Evergrande’s dead or alive? In this system, it doesn’t particularly matter.’”i

All creditors are not Chinese and include also Evergrandes. The dissatisfied lenders sitting outside china will convene in hong kong for an open court hearing on October 30. These cases can lead to the issuance of a directive by a judge for the sale of company’s assets whose proceeds are meant for reimbursement of the foreign creditors.

READ MORE China’s Evergrande News Halts Trading Amid Reports of 300 Billion USD Debt Crisis

Yet, such a project would be massive and complex without any precedent in history. Therefore, most likely, it might require an approbation of Chinese administration.

So what happens to Evergrande? Certain experts even believe that Chinese administration hasn’t made a decision on this matter yet.

As per Logan Wright (director of China Market Research at Rhodium Group), “a lot of the Chinese system is still modeled on the Soviet Union and there were no bankruptcies in the Soviet Union.”

“Remember you deal with western capitalism and it has been in existence since time immemorial and it has already created template on handling their insolvency laws. China doesn’t have this kind if template at all.”

The Chinese may not intervene with Evergrande by declaring a bailout or putting it under receivership. However, in Mr Roberts’ opinion, this would be an enormous political headache for Beijing that would require them to “clean up mess.”

He also noted that such “knock-on effects” could be potentially catastrophic for local governments, suppliers and banks relying on sales of the land.

READ MORE Evergrande Collapse: 300 Billion USD at Risk

Other analysts opine that Evergrande’s demise would impact the future of The Communist Party itself.

“Shitong Qiao, a property-law specialist at Duke University in the USA, warns that social stability is at risk”, the author writes.

“Many Chinese banks would face huge pile of nonperforming assets while several hundred thousand Chinese families will find themselves houseless if a collapse happens.”

At Evergrande’s headquarters in Shenzhen, for example, there have been a number of occasions where protesters hurl insults at the executives while home-buyers who demand that they be refunded are beaten by police officers. 

Many of them went on a mortgage strike last year just waiting for their homes completion.

A collapse might cause the home market to lose confidence and send prices farther lower. In a nation where people invest their life savings in new homes, that would make them significantly poorer. Additionally, as the property sector contributes 25% of the GDP, it would be a blow to an already weak economy.

All of this might exacerbate popular resentment and possibly cause instability. And it is arguably the greatest danger facing the Party, which has long benefited from China’s growth in maintaining its hold on power.

Big enough to fail?

Does it suggest that Evergrande has become “too big to fail”?

This reminds us of similarities that can be compared to the subprime mortgage crisis in 2008 when Lehman brothers collapsed, and the world witnessed a great depression. In the past when banks and some other institutions failed in various parts of the world, governments and central banks supported them with bailouts.

But China is different. Its relationship with the property sector is not as deep like that of The US.

Similarly, Beijing that dominantly manages cash movement is not in hurry to subsidize Evergrande.

As Mr Miller puts it, “the system has been put in place so that an acute crisis is as unlikely as possible.” “Unlike a Western ‘Lehman moment’”.

The policy and leadership in China cannot tolerate a bailout either. However, others believe the Party intentionally brought down Evergrande’s downfall for the enterprise’s operation was based on untrue economics model.

This happened because it borrowed heavily to build homes for middle class Chinese seeking to invest in real estate assets. However, property developers ended up borrowing more than they needed in order to construct more houses than there are buyers.

Mr Roberts says, “This is not a sustainable economic model, and the government knew it”.

Thereafter, this “investment-led growth” — growing merely for the sake of it without paying due regard for whether there was any prospect of sustaining such projects — pushed China ahead long before Mr. Xi Jinping acceded to power in 2012.

However, as time progressed, one of the Party’s slogans that were repeated by Mr. Xi was “they are for housing, and not for speculation”.

The climax of events took place in 2020 when the government became scared that there may be a bubble and they issued a new financial prudence regime or so-called “three red lines.”

Through this they limited the credit facilities for developers and it ended up creating a situation that is still bogging down Evergrande and other building companies in China.

The painful but unavoidable measure proved to be the only way for China’s leaders to curb unsustainable debt. The only thing they did not expect is how bad things will turn out after china experienced devastating zero covid lock down.

However, bailing out Evergrande at this point will essentially be nullifying all efforts the government is making on de-leveraging the real estate sector and reforming the economy,” adds Mr Roberts.

Country Garden was China's biggest developer of residential property
Country Garden was China’s biggest developer of residential property

Mr Wright agrees it would be seen as a backward step: Is it a good sign that you save Evergrande from the sinking?

In essence, China’s leadership is gridlocked. A failure could lead to a financial meltdown and a bailout would not go down well with any politician.

This is definitely a contrarian view, but i truly think that Beijing has a plan on this and Mr Miller says so.

“It has been telling foreign investors to stop lecturing them for relying on artificially excessive growth which stems from borrowings in property sector for years. But this will not take place without pain.”

It remains uncertain what new model Mr Xi, who seems to be more and more in the grip of power, would like to have adopted.

Last year during the Party Congress meeting when he scooped his historical third term as a leader, he cautioned them against further pursuing the unsustainable ‘money worship’ and ‘vested interests’. Rebuking the dangers of unfettered capitalism, he said: Socialism with Chinese characteristics is characterized by the dictatorship of the Communist Party.

The arrest of Evergrande’s Billionaire founder and chairman, Huia Kayan, only served to confirm the belief that ultimately, the Party remains at the helm.

According to Mr Miller, China is deliberately paying the price for “gross economic mismanagement”. However, its firm hold on the economy indicates that it has a strategy.subsection:

However, some still think that is not so obvious.

“Mr Wright states that capitalism is a profit and loss system.” I look forward to seeing how china will compensate on the losses.

READ MORE Evergrande Shares Soar 20% Despite $300 Billion Debt Pile

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