Chinese Real Estate Crisis
The Evergrande Group’s empire spans across 1300 housing projects in almost 300 cities, 58 hotels, 15 under-construction Disneyland-like theme parks and a football team. The Chinese real estate company is buried under a huge debt and is on the brink of default.
The company was able to build its empire mainly by borrowing money from domestic and international markets. It is now facing a debt of US $305 billion and has defaulted twice on payments to offshore bondholders in September 2021.The company’s shares in the Hong-Kong listing lost 80% of their value in the last year and have been suspended from 4th October.
However, this is just the tip of the iceberg. The property market makes up 25% of the Chinese economy and various real-estate developers in China are defaulting on debt payments. Developers such as Fantasia, Modern Land and Sinic holdings have missed their debt payments worth millions of US Dollars. Many of these companies have also witnessed a huge downfall in their share prices.
This puts the Chinese economy at a huge risk as the financial troubles of these developers have the potential to cause the collapse of important supply chains which are highly interlinked since China has the most complete supply chains due to the vast range of manufacturing activities. The sudden collapse of a major non-financial company can cause damaging ripple effects at an unparalleled scale.
A noticeable part of the liabilities of the developers is owed to a number of enterprises in the supply chain such as contractors, subcontractors and providers of construction material and services. The financial distress of the companies can cause illiquidity for its suppliers. During this crisis, the suppliers have to accept longer payment periods and commercial bills instead of cash. Hence, the fallout due to the collapse of a developer will not only lead to loss of business for suppliers but also trap them amidst immediate financial difficulties. This may lead to bankruptcies throughout the supply chain. Unlike the financial sector where firms can switch products easily, the non-substitutability of supply chains implies that the collapse of a major firm can cause severe disruptions in the rest of the chain.
Evergrande has been taking measures to avoid the looming bankruptcy. However, things don’t seem to be going too well. The company intended to sell 51% stake of Evergrande Property Services Group to Hopson Development Holdings for US $2.6 billion. However, the negotiations have been suspended due to the inability to obtain the necessary agreement from the provincial government. The sale of its 26-storey Hong-Kong waterfront headquarters has also been suspended for the same reason.
Even though the People’s Bank of China (PBOC) has powerful tools such as the debt redlines,the new property tax and possible secretive bailouts to mitigate the shock to the financial system, the effects of the outstanding debts can have long-term impacts on the property markets of China and the rest of the world. The possible collapse of the real estate markets and supply chains has the potential to drastically affect the Chinese as well as the world economy.
-Jatin Kulkarni
(FY.BSc. Economics)