Evergrande was a veritable titan in the Chinese property sector just 13 months ago. Today, it finds itself at the heart of historic fiscal turmoil. The company, in its aggressive expansion, would become one of China’s largest companies by accumulating more than $300 billion in debt. On August 24, 2023, it filed for bankruptcy in New York. As we’ve described, this move has freaked out the property market. It has rattled the wider Chinese economy, raising fears about what its collapse might mean in the long run.
The crisis boiled over just as Evergrande was engaged in building a new stadium for football club Guangzhou Evergrande. This project reflected the company’s new, brave ambition to branch into several new sectors. As the firm’s financial crisis deepened, it pulled an audacious stunt. It began to sell properties at enormous losses to create immediate cash flow and ensure its continued ability to operate. This strategy that worked in the short term ultimately wasn’t enough to prevent the eventual impending crash.
As Evergrande’s distress deepened, founder Hui Ka Yan lost 90% of his fortune. Once Asia’s richest person with an estimated fortune of $42.5 billion, Hui’s financial standing has been severely impacted by the company’s mounting debts and subsequent bankruptcy filing. Evergrande’s crisis makes a ripple effect that extends well beyond its own financial collapse. We focus on its direct effects on the Chinese economy and the real estate sector, a pillar of local economic development and home to 29% of China’s GDP.
Fortunately, the Chinese government has begun to realize the dire nature of the crisis. In 2020, it implemented the “three red lines” policy to limit risky borrowing from large property developers, such as Evergrande. These measures were meant to shore up the industry and provide stability, but they haven’t stopped this current crisis from developing. In addition, Evergrande’s woes have put tremendous pressure on consumer spending. Beijing views this spending as essential to jumpstarting China’s sagging economic growth.
Moreover, the crisis has created a ripple effect on regressive allied industries like construction and finance. The financial sector has experienced growing volatility as banks and investors continue to deal with the crushing weight of Evergrande’s unpaid obligations. Further, the Chinese government is intervening to prop up failed real estate projects. To counteract these fallout effects, they are offering low-interest loans through state-controlled banks.
In an attempt to overcome these challenges, President Xi Jinping has moved China’s economic priorities away from labor-intensive manufacturing towards high-technology manufacturing. His apparent goal is to increase healthy competition with the US. This strategic pivot reflects a broader effort to reduce reliance on real estate as a primary driver of economic growth.