Five Lessons Evergrande Taught Us About the Chinese Economy: Planet Money: NPR

Last week, global markets rocked after a Chinese company called Evergrande fell into what looks like a downward spiral into oblivion. Evergrande is, or was, the second largest real estate company in China. A couple of years ago, it was the most valuable real estate stock in the world. He’s also been involved in an eclectic mix of other businesses, from mineral water to electric cars to pig farming. He even owns a professional soccer team. But recently he has been having a hard time paying off a huge amount of debt, a huge $ 300 billion to worth.

Evergrande’s story is bigger than a single company. It is about China’s unsustainable model of economic growth, which has been based on endless investment and a mad frenzy for debt-driven development in recent years. That model helped China skyrocket, but the country is now experiencing some turmoil. Last week, some alarmist observers called this China’s “Lehman moment,” a reference to the Lehman Brothers collapse that preceded the 2008 financial crisis, but China-focused economists argue that is exaggerated.

However, given the interconnectedness of the global economy, investors remain concerned about the future of the Chinese economy. It has been a nuclear reactor that fuels the economic growth of the world. The problems there could have a ripple effect on everyone.

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We decided to put together a little list of what we have learned from Evergrande’s history so far.

1) Real estate has been a big part of China’s economic growth

This aerial photo taken on September 17, 2021 shows Evergrande Cultural Tourism City, which is under construction, a mixed-use residential, retail and entertainment development, in Taicang, Suzhou City, Jiangsu Province, in eastern China. (Photo by Vivian LIN / AFP) (Photo by VIVIAN LIN / AFP via Getty Images)

VIVIAN LIN / AFP via Getty Images


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VIVIAN LIN / AFP via Getty Images


This aerial photo taken on September 17, 2021 shows Evergrande Cultural Tourism City, which is under construction, a mixed-use residential, retail and entertainment development, in Taicang, Suzhou City, Jiangsu Province, in eastern China. (Photo by Vivian LIN / AFP) (Photo by VIVIAN LIN / AFP via Getty Images)

VIVIAN LIN / AFP via Getty Images

China’s economic growth in recent years has been driven in large part by its roaring housing market. The real estate industry, directly and indirectly, represents as much as 29 percent of China’s total GDP. This growth has been driven by a huge housing bubble and mounting amounts of debt. For a time, the nationals and local governments They used their enormous powers of command and control over the economy to keep the bubble inflated. As often happens in bubbles, investors and companies have taken on huge amounts of debt to capitalize on rising property prices. Evergrande himself amassed more than $ 300 billion indebted, to its banks, its bondholders, its suppliers, and its customers, many of whom bought houses months, even years, before they were built.

2) China’s housing bubble has created eerie “ghost towns” and “ghost apartments” across the country.

This photo taken on May 14, 2015 shows a man walking on an empty street in Conch Bay in front of the new Yujiapu financial district in Tianjin, north China.

GREG BAKER / AFP via Getty Images

This photo taken on May 14, 2015 shows a man walking on an empty street in Conch Bay in front of the new Yujiapu financial district in Tianjin, north China.

GREG BAKER / AFP via Getty Images

The Chinese housing bubble, which observers What we’ve talked about for years has increasingly encouraged speculation, with investors buying properties with no intention of living in them. Unfinished and empty buildings and apartments litter China’s provinces. Estimates vary, but around twenty%of China’s total housing stock is now vacant. The Financial Times He saysthere are now enough vacant properties in the nation to house more than 90 million people. There are enough empty houses for the entire population of Canada. Or France. Or Germany.

In some cases, entire urban areas are empty. These so-called “ghost towns” include replicas of Paris, Venice, and even Jackson Hole, Wyoming.

3) The Communist Party of China is now working to reduce financial risks and change its economic growth model.

BEIJING, CHINA – JUNE 28: Chinese President and Communist Party Chairman Xi Jinping appears on a big screen as performers dance during a massive gala marking the 100th anniversary of the Communist Party on June 28, 2021 at Olympic Stadium Bird’s Nest in Beijing, Porcelain.

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BEIJING, CHINA – JUNE 28: Chinese President and Communist Party Chairman Xi Jinping appears on a big screen as performers dance during a massive gala marking the 100th anniversary of the Communist Party on June 28, 2021 at Olympic Stadium Bird’s Nest in Beijing, Porcelain.

Kevin Frayer / Getty Images

One of the main differences between the Evergrande debt crisis and the Lehman Brothers collapse is that this crisis came about on purpose. The Communist Party of China (CCP) has been aware of the dangers posed by its savage housing market for some time. In 2017, President Xi Jinping began to indicate that he wanted to do something about it with a speech to the 19th Party Congress. He said, “Houses are built to be inhabited, not for speculation.”

Last year, the government followed a policy known as “three red lines, “which aims to reduce debt in the housing market, crack down on reckless borrowing, and prevent a market correction from turning into a cataclysm. Historian Adam Tooze calls it “controlled demolition” of the housing bubble.

More generally, Xi has been pursuing radical new policies on behalf of “common prosperity, “an effort to combat growing inequality in China and intervene more strongly in private industries.

In July, Xi launched a test summing up his ambitions for China. He said he wants the country to focus on “pursuing genuine rather than inflated GDP growth and achieving high-quality, efficient and sustainable development.” Evergrande, an example of the excesses of the real estate market, apparently does not represent genuine economic growth. And government policies, which once propelled the company, are now strangling it.

4) Cronyism may have led investors and creditors to overconfidence in Evergrande

BEIJING, CHINA – MARCH 6: Xu Jiayin, a member of the Standing Committee of the 12th CPPCC National Committee and Chairman of the Board of the EVERGRANDE Group, speaks during a press conference on the sidelines of the fourth session of the 12th National Congress of the People on March 6, 2016 in Beijing, China. (Photo by Etienne Oliveau / Getty Images)

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BEIJING, CHINA – MARCH 6: Xu Jiayin, a member of the Standing Committee of the 12th CPPCC National Committee and Chairman of the Board of the EVERGRANDE Group, speaks during a press conference on the sidelines of the fourth session of the 12th National Congress of the People on March 6, 2016 in Beijing, China. (Photo by Etienne Oliveau / Getty Images)

Etienne Oliveau / Getty Images

Evergrande was founded by Xu Jiayin, who not long ago was the richest man in China. Jiayin is well connected. He is a member of the Chinese People’s Political Consultative Conference, an elite group of government advisers. He is also politically astute. For example, him reportedly got Evergrande to buy Guangzhou Football Club after President Xi Jinping said he wanted China to have a great soccer team. Then the company sank millions buying some of the best soccer players in the world.

The New York Times suggests that Xu Jiayin’s connections gave investors and creditors confidence that the company could continue to borrow and be bailed out by the government if things went wrong. They thought Evergrande was too big and too wired to fail. However, in August, when the company began to falter, Xu give up as president of the Evergrande real estate branch, which brought him down even further.

5) Evergrande may just be the tip of the iceberg

SHANGHAI, CHINA – AUGUST 29: Boats travel down the Huangpu River while viewing the city skyline in Pudong District on August 29, 2020 in Shanghai, China.

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SHANGHAI, CHINA – AUGUST 29: Boats travel down the Huangpu River while viewing the city skyline in Pudong District on August 29, 2020 in Shanghai, China.

Kevin Frayer / Getty Images

China’s growth in recent years has largely depended on a gigantic expansion of real estate and all its accoutrements – trains, bridges, and sewers. China has been building and building and building, generating a lot of economic activity in the country. With Evergrande, that kind of growth is finally proving unsustainable, and the Chinese economy is in a period of turmoil. The weird part is that this appears to be, in part, by design. We still have questions. How strongly will China act to contain the damage caused by Evergrande? Will China be able to successfully shift its economic model away from real estate and endless development? How will this change affect the world economy in general? We will pay attention in the coming weeks.

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