Evergrande: China’s Debt Bomb

Hiathan Nguyen

The China Evergrande Group — one of China’s leading real estate companies— is $300 billion dollars in debt. According to CNN reporter Michelle Tah, Evergrande’s ambitious plans are what dug them into this deep hole.

Large scale real estate development is a risk-oriented way of making money. When a company starts a new development they generally only get paid after the building has been finished. In order to start, they need some type of loan. During the recent rise of China’s economy, Evergrande felt their investments would be well protected by the rising market with low interest rates and overzealously began multiple pricy projects. In 2010 they bought the Guangzhou Evergrande soccer team AND built the world’s largest soccer school for $185 million. Guangzhou Evergrande is now building a $1.7 billion dollar stadium shaped like a lotus (pictured above) which will seat 100,000 people. In 2016 construction commenced on Evergrand Fairyland and Evergrande Water World — two massive, fairy-tale inspired theme parks in Qingdao. Even more impressive is Ocean Flower Island, a $24 billion dollar artificial island with parks, sports fields, opera houses, malls, and movie theaters. Aside from these astonishing architectural feats, Evergrande owns over 13,000 housing projects in over 280 cities, employs 200,000 people, and indirectly helps sustain 3.8 million jobs every year (numbers from CNN). 

The New York Times estimates the downfall of Evergrande began with China’s recent regulatory crackdown on “debt bombs” with “reckless borrowing habits”. This restriction meant Evergrande couldn’t borrow enough money to pay off their massive loans and needed to start quickly selling property. Unfortunately, China’s real estate market has since declined and Evergrande is losing money on most of its sales and housing projects. A report showed the apartment sales they made this August only amounted to a quarter of their sales last August.

Although the Chinese government said they would cease to support companies with irresponsible borrowing habits, a $300 billion debt is not only a problem for Evergrande but also the world. A report from S&P global ratings guessed an intervention would happen if the collapse created “a far-reaching contagion causing multiple major developers to fail.” Evergrande owes money to organizations and those organizations owe money to other organizations. Evergrande’s failure to pay their debt would cause a chain reaction or “contagion” which would tank China’s economy and likely spread to other countries. Governments have already been hit hard with stimulus payments from COVID and a collapse right now would be devastating. 

At this point, it’s still difficult to know if China will bail out Evergrande. If it is left to die, Evergrande’s collapse would hurt the Chinese economy and population. If the government steps in they may save China immediate pain, but this leniency will show other companies that irresponsible behavior is tolerated — inevitably leading to a similar situation down the road.  

Sources:

https://www.cnn.com/2021/09/24/investing/china-evergrande-group-debt-explainer-intl-hnk/index.html

https://www.nytimes.com

https://time.com/6099000/china-evergrande/

Image Credit: Eurosport

https://www.eurosport.com/football/work-begins-on-100000-capacity-stadium-in-guangzhou_sto7732038/story.shtml