The growth-at-all-costs strategy that has driven China’s remarkable growth over the past 30 years is illustrated by the bankruptcy of Evergrande’s US operations, which serves as a cautionary tale about the model.
Evergrande, which was formerly considered to be one of the most successful real estate developers in China, gorged itself on debt for several decades as China’s economy was experiencing explosive growth. Because there was such a high demand for housing, homebuilders frequently pre-sold apartment units to customers before the building of those units was even finished.
However, because of a dramatic shift in policy made by China’s leaders two years ago, the country’s property developers have been left scrambling for cash, which has compounded the financial concerns within the world’s second-largest economy.
What exactly occurred with Evergrande?
Evergrande’s demise began in 2021, when the central government took steps to limit excessive borrowing in an effort to control the growth in housing prices. As a result, a significant source of finance for property developers was essentially cut off. This was the beginning of Evergrande’s fall from grace.
Evergrande, which has liabilities of $300 billion, was unable to accumulate sufficient cash reserves in a timely manner in order to meet its financial obligations.
In December of 2021, it went into default, which caused a panic on the market. After that, there was a wave of defaults, and China’s enormous real estate market has still not recovered. Construction was halted on hundreds of projects, leaving many “pre-sale” buyers without a new house and with a significant amount of remaining debt to pay off.
Whatever happens next in China’s efforts to restructure its offshore loans worth billions of dollars, the results will have significant repercussions for the country’s financial system.
On Thursday, Evergrande (pronounced “ever grand,” with a silent final “e”) filed for Chapter 15 bankruptcy, which is a method for international firms to use US bankruptcy law to restructure debt. Chapter 15 bankruptcy is a way for foreign corporations to use US bankruptcy law to restructure debt. Due to the over $19 billion in offshore debts that Evergrande owes, the procedure will take some time.
What’s the next shoe going to be?
The liquidity problem that Evergrande experienced was only the beginning of the company’s troubles. Since then, a number of China’s largest builders have defaulted on their loans as companies struggle to maintain enough financial reserves and consumer demand for housing decreases.
Investors from all around the world are keeping a watchful eye on Country Garden right now because the company has missed two payments on its multibillion-dollar debt and has stated that it is considering “various debt management measures.” Country Garden employs over 300,000 people.
Moody’s, which lowered its rating on Country Garden just a week ago, deems the cash-strapped developer’s debt to be an asset with a “very high risk” currently.
The payments that Country Garden has missed must be made by the beginning of September at the latest.
The Chinese economy is in a difficult position.
It would be difficult to overestimate the significance of the Chinese real estate market. The sector is responsible for as much as thirty percent of the country’s total economic activity, and more than two thirds of the wealth held by individual households is invested in real estate.
However, the limitations known as “zero Covid” that have been in place for nearly three years have stifled the expansion of China’s economy, and people have been hesitant to purchase new homes in the face of rising unemployment and declining property values.
China’s economic engines have been struggling to gain traction ever since they experienced a brief burst in activity earlier this year. Prices paid by consumers dropped for the first time in over two years in the most recent month; because the rate of youth unemployment has been rising so quickly, the Chinese government simply chose not to release the data for July. There has been a decline in production at factories, as well as in export demand and retail sales.
Why can’t Beijing simply save these enterprises from bankruptcy?
It’s not very likely. Even though Beijing has taken some attempts to assist in jumpstarting demand for housing and freeing up funds for developers, it appears that the days of large, state-funded bailouts for bloated industries are coming to an end.
“We must maintain historic patience and insist on making steady, step-by-step progress,” President Xi Jinping stated in a recent speech. “We must insist on making steady, step-by-step progress.”
