What happened: Evergrande Group, China’s second-largest property developer by sales, filed for bankruptcy in the US on Thursday last week.
Its collapse has opened a Pandora’s box of issues that have become a focal point for regulators, investors, and analysts around the globe, as well as denting consumer confidence, already battered during and after the pandemic.
The business declined sharply over the past few years, teetering and finally falling over the edge, sending shockwaves across China’s economy.
Evergrande started unraveling in 2020, when regulators began tightening borrowing rules for developers in response to excessive financial risk-taking in the sector, imposing the “three red lines” policy, as reported in the South China Morning Post.
Racking up a net debt of $300 billion, Evergrande, which had pre-sold a large volume of properties prior to construction or completion, found itself at odds with these restrictions.
Its attempt to deleverage became a Herculean task, and the firm’s shares and bonds began to tumble, with Fitch Ratings and other agencies downgrading its credit rating in June 2021. Even as the company navigates a restructuring process as a result of filing for bankruptcy, uncertainties loom large. Some analysts believe that a government bailout might be on the horizon to prevent a complete collapse.
Evergrande, which drove much of China’s property boom, now finds itself straddled with $300 billion of debt. If Beijing doesn’t come to the rescue, will Evergrande’s collapse spark a financial crisis? Photo: Shutterstock
The Jing Take: Evergrande’s decline comes at a delicate time for China’s economy. Analysts have speculated about a potential “domino effect,” whereby the failure of one large developer could impact others that also face enormous debts. The situation could spark a broader liquidity crisis.
Furthermore, the housing market is a vital pillar of China’s economy, contributing around 30% of GDP, reports the National Bureau of Statistics of China. A collapse in this sector could reduce growth or even push the economy into a recession, a concern echoed by the International Monetary Fund.
Discussion on Chinese socials has tapped into massive public anger at the company. One WeChat netizen @艺心益意’s popular comment argued: “To be honest, many of the so-called “debts,” in fact, haven’t been repaid. In the end, the burden behind these payments has been borne by many ordinary people.”
The fallout has impacted smaller suppliers, banks, and even global markets that are exposed to Evergrande’s debt, causing broader uncertainty in China’s financial sector. Meanwhile homebuyers, who poured their life savings into Evergrande’s properties, have found their investments at risk. Protests had erupted around the company’s properties in China, with buyers demanding repayment, or the completion of housing projects.
Much rage online is directed at the company, with banks, governments and ordinary property buyers left to pick up the pieces. Another commenter wondered if the “Lingchi” 凌迟 punishment (an ancient form of torture and execution called ‘lingering death’, slow slicing, or death by a thousand cuts) could be bought back in China for Evergrande. Weibo user @冰雪飘飘66 says: “Evergrande had long planned an escape route, avoiding risks; in the end, it’s the interests of the common people at the bottom that will be harmed.” Whilst other @橙亿满满d asked: “Who will protect the rights and interests of the common people?”
Evergrande’s decline is more than an isolated corporate failure. It has become emblematic of broader systemic risks in China’s financial sector and economy, and creates significant global risks. What remains to be seen is how the Chinese authorities balance the need for market discipline with the imperatives of maintaining growth and stability.
This story undoubtedly holds lessons for regulators worldwide. But also its implications for everyday homeowners and China’s middle class could spell disaster for consumer confidence, trust and spending. Stay tuned to track this critical issue in the coming months.
– Additional research by Qian Liang
