Evergrande Default Could Rock China’s Entire Economy
by Antonio Graceffo, September 16, 2021
Analysis
China’s public debt already stands at 270 percent of GDP, and non-performing loans have hit $466.9 billion. In addition to existing economic challenges, real estate giant Evergrande Group has signaled that it may default on payments owed to creditors.
China’s second largest developer has been facing a liquidity crisis, as its onshore bond trading has been suspended. Without access to funding, Evergrande will find it impossible to pay suppliers, finish projects, or raise income, making default more likely—an eventuality which could send ripples through the entire Chinese economy.
Evergrande made $110 billion in sales last year and has $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 owes total liabilities of $305 billion, making it the most indebted real estatedeveloper 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. Consequently, the company’s stock price has dropped by 90 percent over the past 14 months, while its bonds were trading at 60 to 70 percent below par.
Evergrande accounts for 4 percent of total Chinese real estate high-yield debt. The company’s debt is of such significant size that it may pose systemic risk to China’s banking system. Late or defaulted payments by Evergrande could cause a chain reaction of defaults across institutions. An Evergrande sell-off could drive down prices, crashing over-leveraged developers. Authorities worry that this threatens to destabilize the entire real estate sector, which comprises about 30 percent of the Chinese economy.
Additionally, Evergrande has implications for the labor market. The company employs 200,000 people regularly and 3.8 million per year, on a project basis. After 18 months of sporadic COVID-19 lockdowns, China needs more, not fewer, jobs.
Evergrande is expected to be unable to meet interest and principal payments due next week.
The People’s Bank of China and the China Banking and Insurance Regulatory Commission warned Evergrande’s executives to reduce its debt risks. Beijing instructed authorities in Guangdong Province to coordinate with potential buyers of Evergrande’s assets. Meanwhile, regulators have signed off on a proposal to let Evergrande renegotiate payment deadlines, which would grant a temporary reprieve.
Evergrande is not the only problem in China’s debt market. By midyear, Chinese onshore and offshore defaults already totaled more than $25 billion, which is nearly the same amount as for the entire previous year. Real estate firms accounted for about 30 percent of these defaults. Some of the larger culprits were China Fortune Land Development and Sichuan Languang Development. Furthermore, the transportation, tourism, and retailing sectors have been particularly hard hit by the pandemic lockdowns, increasing defaults in those sectors. Some state-linked companies have also suffered defaults, such as Yongcheng Coal & Electricity Holding Group and Tsinghua Unigroup. Additionally, China Huarong Asset Management, a majority state-owned company, failed to release its 2020 results on schedule. Between the main company and its subsidiaries, Huarong had $39 billion of debt outstanding, eventually posting a $15.9 billion loss 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 hit a record 160 percent, up from 101 percent 10 years earlier. Chinese leader Xi Jinping has made it a priority to rein in the debt, particularly in China’s $10 trillion shadow banking sector. Local government financing vehicles (LGFV) have defaulted on many trust loans in the shadow banking system, but not on a public bond. So far, this year, 915 million of LGFV have defaulted. This so-called hidden debt of local governments has become so pervasive that Beijing has named 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 investors, fearing contagion, might panic and begin selling off both good and bad debt, driving down the market.
A complete collapse of Evergrande could cause widespread economic turmoil and even civil unrest. The future of Evergrande and the Chinese economy depends on whether or not the central authorities will allow Evergrande to go into default, leaving its creditors high and dry, or if the Chinese Communist Party will intervene in order to maintain stability.
Antonio Graceffo, Ph.D., has spent over 20 years in Asia. He is a graduate of Shanghai University of Sport and holds a China-MBA from Shanghai Jiaotong University. Antonio works as an economics professor and China economic analyst, 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 Analysis was orginally Published in the Epoch Times
