Evergrande a Chinese property developer has recently been in the news for its financial situation. The company currently has around 350 billion dollars worth of liabilities and is about to go into default. The CCP (Chinese communist party) are stating they will avoid a bailout of the company striking fear in a potential domino effect.
The Chinese economy has been growing immensely for decades outpacing US growth. For the last couple of years, this growth has primarily been driven thanks to easy credit meaning, therefore, many Chinese companies are highly leveraged. Evergrande is one of these highly leveraged companies and has been recently struggling to pay its obligations.
So why is this situation scaring investors around the world? Well, the primary vehicle for growth over the past couple of years in China has been rampant speculation in the real estate sector. Therefore, one of the largest property developers going into default will have a knock-on effect. It seems that Evergrande is already trying to dump their real estate portfolio driving prices lower and threatening other highly leveraged property developers. China used more concrete during 3 years than the entire US used during the 20th century. That number really gives perspective on how important property development is to the Chinese economy. In 2019 the real estate sector accounted for 10 per cent of GDP. A slowdown in the worlds second-largest economy would no doubt affect the growth of the global economy.
There is also a risk of social unrest due to the 1,5 million people who are on the cusp of losing their deposits. Due to China being the global factory a slowdown in production would also represent a threat to the global supply chain which already is in a vulnerable place after covid.
What is the most likely outcome? While the CCP has publicly stated that they won’t be bailing out Evergrande, I believe that a collection of banks and real-estate developers will bail out the company because of the potential risk the collapse poses to the Chinese and world economy.