Evergrande: Catalyst or Blip?

The real estate behemoth, Evergrande, which owns about 2 trillion yuan in assets, equivalent to 2% of China’s GDP, found itself amidst a liquidity crisis which prompted fears of debt defaults and sent its shares tumbling (1).

Having lured investors in with the promise of high-yield returns and gifted luxury items (2), the company is now scrambling to pay stakeholders back the aggressively expanded, upwards of 300bn dollar debt, by any means available (3). The cost of its ongoing crisis is high for Evergrande’s market value (4) and is reverberating into China’s property sector, which represents roughly 20% of China’s GDP and 62% of household wealth (5).

Neighbouring stock markets have also felt the shockwaves (6). While the debt regulations China implemented in 2020 were primarily to avoid falling into the true Covid crisis, that of never-ending QE and money printing, Evergrande, one of China’s many over-leveraged real estate companies, found itself on the wrong side of the regulations. While the effects are being felt heavily by its investors, they are unlikely to be the catastrophe to China’s—or the world’s—financial and economic structure as has been hyped (7).

China’s domestic equity market, for example, has not reacted much, indicating that the Chinese have not lost trust in the system. The government’s strategy is to focus all remaining assets on project completion versus paying interest rates and paying back loans to bond holders. While investors will be the ones taking the hit, this approach is beneficial on a macro level, both to its citizens and the real economy (8). I

n the end, China’s policy doctrine remains the same: helping consumption and the common man to increase living standards at the expense of overly-wealthy capital market investors. In the mid-term, this also serves to make China less dependent on the rest of the world and able to maintain GDP growth.

As the world watches for any signs of collapse in China’s financial system, they would do well instead to keep an eye on their own front yard, particularly the US, who’s market and overall economy relies primarily on a well-oiled capital market and debt finance, and where such a shock could shatter all faith in their debt-driven system.

 

References

  1. What Is China Evergrande and Why Is It In Trouble?

  2. With Gucci bags and Dyson appliances, Evergrande wooed retail investors

  3. China Braces For ”Nightmare Scenario” As Evergrande Offers Broke Investors Discounted Apartments

  4. Evergrande’s crisis hits wealth product investors

  5. ”The Housing Market Is Almost Frozen” - An Even Bigger Problem Emerges For China

  6. S.Korean stocks post weekly decline as Evergrande debt woes continue

  7. Evergrande’s Fall Shows How Xi Has Created a China Crisis

  8. China Steps In To Ensure Evergrande Funds Used To Complete Housing Project, Not Pay Creditors


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