Evergrande Crisis: A Wake-up Call for China’s Economy

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  • Evergrande is saddled with debt it cannot repay
  • Dozens of angry investors picketed Evergrande’s headquarters

Debts plaguing China’s top property giant Evergrande Group are a wake-up call for the country’s economy, says an article published in The Economic Times.

Evergrande’s debt crisis

Emily Feng, writing in NPR said that the buyers of an estimated 1.4 million Evergrande units all over China are now uncertain whether the properties they paid for will ever be built.

The embattled developer, China’s second-biggest by sales volume last year, is saddled with debt it cannot repay. It owes a total of USD 368 billion in loans to banks and liabilities to contractors and suppliers, said Emily Feng.

Evergrande is set to default on at least one tranche of bond interest payments totaling around USD 120 million, due at the end of September.

Dozens of angry and worried investors picketed Evergrande’s headquarters in the southern city for weeks. They had bought investment products from Evergrande that now look nearly worthless, as its Hong Kong-listed stock plummeted by nearly 90 per cent in value this year.

The two objectives of China’s Communist Party

The financial woes are contrary to the two objectives for China’s Communist Party, they are, force China’s private sector away from speculative and risky lending practices that pushed debt to dangerous levels while avoiding a financial meltdown and the collapse of the property sector, in which more than 70 per cent of the nation’s urban wealth is locked up.

“This is a part of long-term fiscal reform to de-risk, deleverage, and to shift away from [local government] land financing. These two goals are a good thing,” says Bo Zhuang, the chief China economist at Loomis Sayles, an investment firm. “But there’s a risk of further spill-over to other developers, potentially causing a banking crisis or debt crisis.”

What are the consequences?

For nearly three decades, Evergrande bet big on China’s booming infrastructure build-up. It took out loans that often carried double-digit interest rates and gambled that its sales of yet-to-be-built apartments would be high enough to service ballooning debt, reported NPR.

Financial regulators tolerated these risky lending practices because of how developers such as Evergrande helped generate huge amounts of property wealth and sale revenues for local governments while turning millions of citizens into homeowners.

The Chinese state has strongly indicated it will no longer allow developers like Evergrande to take out loans it cannot pay back and sell investment apartments no one needs just to raise housing prices.

Policymakers have also signaled that they will push local governments to reduce their financial dependence on selling land for revenue, one of the key drivers behind China’s property boom, said Emily Feng.

Impact of COVID-19 on the economy

An economic slowdown brought on by the COVID-19 pandemic was already dragging down property purchases. Last summer, new government policies to curb speculative investments restricted the number of homes people could purchase. These rules took some buyers by surprise.

Last year, Beijing also implemented its three red lines  policy, referring to three strict caps placed on the ratio of debt a property developer can hold about to with concerning its assets, equity and cash on hand.

Under this combination of new rules, Evergrande could not sell enough apartments fast enough to pay back its debts at the pace mandated by regulators, said Emily Feng.

One question is whether pushing Evergrande to shape up may destabilize the whole Chinese banking system. Buyers are so spooked over Evergrande that other developers are now seeing falling property sales and plunging stock prices, potentially setting off more property defaults in China.

Global stock markets have been roiling from the uncertainty as well. This month, the Dow Jones Industrial Average had its worst performance since

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Source: The Economic Times

 

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