Just in case you’ve never heard of it, Evergrande is China’s second largest property development company. It has 1,300 projects spread over hundreds of Chinese cities, but more to the point it is $300 billion in debt.
Evergrande’s share price this year has fallen on fears that the company is running out of money to pay creditors. The slide has now turned into a headlong rush — and dealing in the company’s bonds has been suspended.
It’s not just the markets that are panicking. Last week, angry protesters besieged the company’s offices.
If it collapses, the consequences could extend much further than the company’s creditors and investors. Indeed, there are fears that Evergrande could be China’s Lehman Brothers — the American financial services giant whose 2008 collapse came close to bringing down the banking system.
Let’s not forget that the Global Financial Crisis began in the booming US property market. The contagion then spread to European property markets helping to fuel the Eurozone Crisis. However, in recent years real estate activities have become even more important to the Chinese economy that they were in the West — just take a look at the following chart:
To put it another way, China builds around 15 million new homes every year — which is more than five times America and Europe combined.
The country’s developers have sustained this rate of activity through a massive expansion of credit, and therefore the fear now is not just for Evergrande, but for the entire real estate sector and therefore the Chinese economy as a whole (which, of course, means the world economy too).
The big question is whether the Chinese government can contain the fall-out from Evergrande in the way that western governments eventually contained the collapse of Lehman Brothers. In theory, Beijing is in a stronger position because so many of the key players are state-owned. Furthermore, when the authorities put a gun to the head of big business that’s not necessarily a metaphor.
However, the fact is that we’ve never been here before. For all the involvement of the state in the Chinese economy, novel forms of finance have evolved at a pace that can outstrip anything we’ve seen in the West.
Writing for UnHerd, Lee Jones points out that the Chinese state is far from monolithic. Provincial and local governments have a great deal of operational independence — and that includes the local government financing vehicles that play a big role in property deals.
Of course, it’s also possible that Xi Jinping gets a grip on the situation (he’s had practice), but that Evergrande triggers a crisis of confidence in property-based assets in other countries. There ought not be a direct link between the special situation in China and our own over-priced housing stock, but markets aren’t always rational.
It would be an irony if the contagion from a Chinese event causes more harm to the West than it does to China. Then again, it wouldn’t be the first time.