Friday, October 15, 2021

Evergrande default could shake China’s entire economy


China’s public debt already accounts for 270 percent of GDP, and non-performing debt has reached $466.9 billion. In addition to the current economic challenges, real estate giant Evergrande Group has indicated that it may default on creditors’ payments.

China’s second largest developer is facing a liquidity crisis as its onshore bond trading has been suspended. Without access to funding, it would be impossible for Evergrande to pay suppliers, complete projects or increase income, making default more likely – an event that could send ripples through the entire Chinese economy.

Evergrande generated $110 billion in sales last year and $355 billion in assets. In June, it failed to pay some commercial paper and the government froze a $20 million bank account. The company now has total liabilities of $305 billion, making it the most indebted real estate developer in the world. It is also the largest issuer of dollar junk bonds in Asia. Evergrande owes money to 128 banks and over 121 non-banking institutions. As a result, the company’s stock price has fallen 90 percent over the past 14 months, while its bonds were trading 60 to 70 percent below par.

Evergrande accounts for 4 percent of total Chinese real estate high-yield loans. The company’s debt is of such size that it could pose a systemic risk to China’s banking system. Late or defaulted payments by Evergrande can lead to a chain reaction of defaults in institutions. Evergrande’s selloff could drive prices down, causing over-leveraged developers to crash. Officials worry that this threatens to destabilize the entire real estate sector, which comprises about 30 percent of the Chinese economy.

Additionally, Evergrande has an impact on the labor market. The company employs 200,000 people regularly and 3.8 million per year depending on the project. After 18 months of sporadic COVID-19 lockdown, China needs more, not less, jobs.

People gather to demand repayment of loans and financial products at Evergrande’s headquarters in Shenzhen, Guangdong Province, China on September 13, 2021. (David Kirton/Reuters)

Evergrande is expected to be unable to pay interest and principal due next week.

The People’s Bank of China and the China Banking and Insurance Regulatory Commission warned Evergrande officials to reduce their credit risk. Beijing directed officials in Guangdong province to coordinate with potential buyers of Evergrande’s property. Meanwhile, regulators have signed off on a proposal to let Evergrande renegotiate the payment deadline, which would provide a temporary relief.

Evergrande isn’t the only problem facing China’s debt market. By mid-year, Chinese onshore and offshore defaults already totaled more than $25 billion, roughly the same amount as last year. Real estate firms contributed about 30 percent of these defaults. Some of the big culprits were China Fortune Land Development and Sichuan Languang Development. In addition, the transport, tourism and retail sectors have been particularly hit by the pandemic lockdown, leading to increased defaults in those sectors. Some state-linked companies have also faced defaults, such as Yongcheng Coal and Electricity Holding Group and Tsinghua Unigroup. Additionally, China Huarong Asset Management, a majority state-owned company, failed to release its 2020 results on time. Between the main company and its subsidiaries, Huarong owed $39 billion in debt, ultimately resulting in a loss of $15.9 billion for 2020.

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Over the past several years, China’s corporate debt to GDP ratio has been steadily increasing. In 2017, it rose to a record 160 percent, up from 101 percent 10 years earlier. Chinese leader Xi Jinping has prioritized curbing debt, especially in China’s $10 trillion shadow banking sector. Local government financing vehicles (LGFVs) have defaulted on many trust loans in the shadow banking system, but not on public bonds. So far this year, 915 million LGFVs have defaulted. This so-called hidden debt of local governments has become so widespread that Beijing has made it a national security issue.

Investor confidence has been shaken, as both private and state-linked companies, once considered safe investments, have been in default. The danger is that the fear of infection may cause investors to panic and start selling both good and bad debt, which could lead to a fall in the market.

The complete collapse of Evergrande could lead to widespread economic turmoil and even civil unrest. The future of Evergrande and the Chinese economy depends on whether central authorities will allow Evergrande to go into default, leave its creditors high and dry, or if the Chinese Communist Party will intervene to maintain stability.

The views expressed in this article are those of the author and do not necessarily reflect the views of The Epoch Times.

Antonio Gracefo


Antonio Gracefo, Ph.D. Has spent over 20 years in Asia. He is a graduate of Shanghai University of Sport and has done China-MBA from Shanghai Jiaotong University. Antonio works as a professor of economics and economic analyst for China, writing for various international media. Some of his China books include “Beyond the Belt and Road: China’s Global Economic Expansion” and “A Short Course on the Chinese Economy”.


This News Originally From – The Epoch Times

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