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
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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.
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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.
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
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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
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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