Evergrande, a Chinese property developer, finds itself in the throes of a financial crisis, with debts totalling over $325bn (£269bn), surpassing even Russia’s national debt. The company’s shares have plummeted to near worthlessness, while more than a million individuals await the completion of their homes.
The Hong Kong court could soon instigate a new phase in this ongoing debacle. A decision on Monday might entail the liquidation of some of Evergrande’s assets as a means of reimbursing disgruntled foreign investors. Evergrande has become emblematic of China’s faltering real estate sector, notorious for unsustainable debt and impending financial catastrophe.
In contrast to most Western countries, where a company like Evergrande would either face liquidation or government bailout, China’s unique hybrid economy – neither purely capitalist nor communist – allows for a different approach. Beijing has been able to alleviate pressure on the company in ways other countries cannot. The company survives only because the government allows it, according to Leland Miller, CEO of China Beige Book.
Evergrande’s debt is primarily owed to domestic creditors, including homeowners, suppliers and banks. The Chinese government’s control over these entities enables Evergrande’s continued existence. The Chinese state, unlike Western countries, exerts significant control over the market. It can dictate lending, borrowing and supplying, effectively propping up Evergrande.
However, some of Evergrande’s creditors are based outside of China. A minor yet frustrated group of these lenders have scheduled a court hearing in Hong Kong on 30 October. The judge could potentially order the liquidation of company assets to reimburse these foreign creditors. This would be a first in terms of scale and complexity and would almost certainly require the approval of Chinese authorities.
The Chinese government could allow Evergrande to collapse, but that would entail dealing with the aftermath, which would likely be politically challenging. According to Dexter Roberts, a senior fellow at the Atlantic Council, the consequences for local governments, suppliers and banks could be potentially catastrophic. Others contend that the collapse of Evergrande could pose a threat to the future of the Communist Party.
A failure of Evergrande could lead to a significant loss of public confidence in the housing market, possibly leading to further price drops. This would leave investors considerably poorer in a country where life savings are typically invested in new homes. Furthermore, it would negatively impact an already sluggish economy, given that the property sector accounts for a quarter of it.
Drawing parallels with the subprime mortgage crisis of 2008 might seem tempting. However, China’s financial system differs significantly from that of the US, particularly regarding the relationship with the property sector. Beijing, with its tight control over money flows, seems reluctant to bail out Evergrande.
Some suggest that the Chinese government intentionally facilitated Evergrande’s decline, viewing the company’s success as reliant on an erroneous economic model. The government introduced new financial regulations in 2020, known as the “three red lines”, which significantly restricted developers’ ability to borrow more money, thereby leading to the crisis that engulfed Evergrande and the rest of China’s property sector.
Despite the turbulence surrounding Evergrande, the arrest of its billionaire founder and chairman, Hui Ka Yan, underscores that the Chinese Communist Party remains firmly in control. According to Miller, while China is knowingly paying the price for economic mismanagement, the government’s continued control over the economy suggests a strategy is in place. However, others argue that this is not as clear-cut.
