Turmoil in the Chinese Housing Market

Symptoms of a Global Recession?

The Chinese housing market bubble seems to be on the verge of bursting. One of the biggest real estate firms in China, Evergrande, is facing serious problems regarding its excessive accumulation of debt. Numerous people fear that the shockwaves sent by a potential fall of the real estate giant might even reverberate outside of China’s borders. The Genesis of this story stems from Evergrande’s method of financing its projects. 

Evergrande has been financing most of its projects through borrowing, a tacting which has resulted in the total debt of the company arising to $300 billion USD. Although borrowing tends to be a good strategy for business growth in the short term, the loan has to be paid back at some point in the future. Unfortunately, Evergrande had missed several payments to its lenders in the past months, and to add insult to injury, its shares have fallen by almost 80% this year, an extremely high figure. 

The main fear amongst analysis and common people alike, in and outside of China, are the repercussions that a potential collapse of Evergrande would have on the world economy.  As Evergrande’s total liabilities amount to about 2% of the Chinese GDP, the second greatest GDP in the world behind the USA and one of the major exporters in world trade, it is worrying to see such developments unfold right before our eyes. The Economist Intelligence Unit – EIU – claimed that “The financial fallout would be far-reaching. Evergrande reportedly owes money to around 171 domestic banks and 121 other financial firms”. 

But there might be some solutions to the problem. First, the Chinese government could “bail out” Evergrande by paying its debt, but this option is the most unlikely for it is only very recently that China has developed some sort of trust amongst foreign firms and investors alike. “Bailing out” Evergrande could send a dangerous message to other Chinese firms in debt as well as foreign investors and firms alike, something Beijing wants to avoid.  Ultimately, the Chinese government proposed that Evergrande’s CEO, Hui Ka Yan, would pay part of the debt from his own pocket. While yet again this is a  difficult option, considering his net worth is about $7.6 billion USD, which is an insignificant amount compared to Evergrand’s debt, it might be a semi-feasible option.

Hopson Development, an Evergrand’s competitor based in Hong Kong, offered to purchase 51% of its shares for about $5 billion USD, but Evergrande decided to terminate negotiations with the Hong Kong firm and decided to restart its projects and return to the stock market (where they initially had to take a break from as negotiations with Hopson Development began), which leaves very few options left on the table.

The situation is still unfolding and it is very precarious. It is difficult to draw concrete conclusions in these sorts of situations, only future developments will tell us whether China will be able to get out of this unscathed or severely wounded.

by Antonio

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Find us on Instagram @basis.baismag

Images from Unsplash

Sources: 

https://www.bbc.com/news/business-58784316
https://www.nytimes.com/2021/10/20/business/evergrande-hopson-stake-sale.html
https://www.businessinsider.com/china-tells-evergrande-founder-to-repay-debt-with-own-money-2021-10?international=true&r=US&IR=T
https://www.bbc.com/news/business-58579833
https://www.bloomberg.com/news/articles/2021-10-26/china-urges-evergrande-founder-to-pay-debt-with-personal-wealth

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