Evergrande could trigger a global economic crisis
The real-estate bubble in China is reminiscent of 2008 — only worse
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.
Like what you’re reading? Get the free UnHerd daily email
Already registered? Sign in
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.
Great mini article, but why wasn’t the author given the opportunity to write a full length article? Unherd seems willfully blind to economics even though it could literally be our downfall.
As the article informs us “in recent years real estate activities have become even more important to the Chinese economy that they were in the West”. I was looking at statistics on rates of home ownership in different countries. Cuba, China and Romania have the highest rates of home ownership. The countries with the lowest rates of home ownership include Switzerland, Austria and Germany.
China’s per capita GDP is not that impressive: slightly better than the Dominican Republic, but not as good as Botswana, according to Worldometer. So focusing the population’s attention on home ownership can be useful tool for politicians. It certainly worked for a time for Fidel Castro when he decreed that everyone should become the owner of the property that they lived in. (In the long run, his housing “policy” was not a success.)
Botswana is one of the most successful country in sub Saharan Africa, so that data was cherrypicked a bit. Nevertheless I see $6k per capita for Botswana, and $10k for China.
There are two GDP measures. I used PPP, which is generally regarded as more indicative of actual purchasing power.
Even with that I get $17k for China and $16k for Botswana. The Dominican Republic is also a fairly successful country at about $18k per capita ppp. Both nations are cherry picked because they are in poor regions, but they aren’t poor.
The poorest nations are about $300 or so. All these countries are solidly middle income, ahead of many Eastern European countries.
And of course China confines to grow. 7% a year means doubling every decade.
I used the data from Worldometer. Of course the data is going to change in the future, but so what? The whole point of the article and my post is the current house-building problems, not future ones.
This article needs to give a fuller perspective. $300 billion in China is £200 per head so can be managed by the Government. Who holds shares and bonds in Evergrande? How have they funded their purchases? If borrowed is it sufficiently concentrated in particular institutions to create fears on their liquidity? Are there systemic reasons for this particular failure to suggest it is the tip of an iceberg? 2008 did demonstrate that Governments can contain the contagion of fear so without more information this does not look big enough to collapse the world economy. Though I fear the regulators will not have applied the necessary checks and balances rigorously enough, nor in a way that puts the risk squarely on management and shareholders rather than tax payers.
Join the discussion
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.Subscribe