Evergrande Crisis: China's Black September?

China's real estate giant Evergrande (China Evergrande Group), which has recently been followed closely by global markets, is struggling with the debt crisis. There is talk of a debt payment of approximately 300 billion dollars. According to Aberdeen Standard Investments, the liquidity crisis in the company may lead to a major crisis that could spread throughout the real estate sector, due to the failure to make scheduled loan interest repayments to September 20.

These days, there are comments in the international press that the Chinese version of the Lehman Brothers mortgage crisis of 2008 is happening. Probably, its global impact will not be as great as the 2008 crisis, but the possibility of default of Evergrande, which operates in the southern Chinese city of Shenzhen, has raised questions about the Chinese housing market in general. This situation has also led to an anxious expectation in the Chinese financial markets. Evergrande, which employs 200,000 people, is a large construction company that provides indirect employment to approximately 3.8 million people. There was a perception that the company, which has made millions of citizens homeowners with around 1300 construction projects spread across the country, was 'too big to fail'. The football club purchased by the company was named 'Guangzhou Evergrande'. The construction of the world's largest stadium (100 000 seats) for this club was started by Evergrande at a cost of 1.7 billion dollars. The architecture of the stadium, which is planned to be completed in 2022, was inspired by the 'lotus' flower. The company has also started to build an island city in the middle of the sea with tourist facilities, which is famous as the Hawaii of China, with the opening planned to take place in late 2021.

Evergrande has yet to complete the construction of the approximately 1.4 million homes it collects from its clients. On top of that, customers who could not receive their homes demanded their money. When the company could not make the payments of the 300 billion debt that it had previously collected from the market, the market completely lost its trust in the company, which triggered the crisis. As a result, it is only a matter of time before a crisis begins to affect not only Evergrande, but the entire financial system. The company, which lost value by experiencing a decrease of up to 80% in the stock market, needs the financial support of the Chinese government in order to recover in the future. Meanwhile, the residents who lost their money to Evergrande and the Chinese holding the company's shares started demonstrations and demonstrations in front of the company's headquarters in Shenzhen, thus the crisis deepened in the social dimension. On the other hand, the biggest factor causing the crisis is the low-interest loan facility policy of the Chinese government to support the development of the housing sector in the past. In this way, the Chinese housing market, which has reached a size of 16-25% of the gross domestic product, has become one of the locomotive sectors of the economy. However, across China, marriage rates have dropped by nearly 40% over the past seven years. Accordingly, construction companies had difficulty in finding new customers, and the majority of the houses they produced remained in their hands. Construction companies such as Evergrande, who could not find new customers and therefore no hot money to turn the wheel, had difficulty in turning the wheels of the housing sector, and financial crises in such companies have become commonplace. The fact that Evergrande is a huge company (it is a company in the top 500 in the world) has caused the crisis faced by this company to cross the borders of China and move to an international dimension. Experts on the subject have recently underlined that if this crisis is not managed properly by the government, it may lead to the partial collapse of the country's financial system, and Beijing may have to take radical decisions that will reform the entire housing sector.

Although the growth trend continues in China's economy, stagflation has been mentioned recently. Especially experts who follow the Chinese stock market make such comments. It is understood that the reflections of this on the construction sector are expected. According to Chinese statistical data, house sales in the country in 2020 decreased by 19.7% compared to 2019. This downward trend still continues. This situation causes housing prices to remain stable or even fall across the country. Not having enough sales causes construction companies to face liquidity problems.

Credit rating agency S&P downgraded Evergrande to CC after the developments. The company's outlook turned negative.

Shortly after he came to power in 2013, Xi began to emphasize the need to get rid of an economic life like China's construction sector, which feeds the "bubble" growth figures, and to focus on quality and high value-added growth based on the manufacturing industry. On top of that, Beijing has a place of inflated economic size. There have been studies that show that it should switch to an economic model that is more grounded and based on real figures. Xi's fear was that the country's economy, which grew unchecked, would not be able to withstand any major financial crisis unless economic life was reformed.

Now, it is said that this crisis with Evergrande is a "warning" to Beijing to implement structural reforms and radical measures that have been delayed for years. Comments like that, with a little effort, the government can save Evergrande, payments can be made to foreign investors who own $20 billion of the company's shares in the stock market, but if the necessary reforms are not made as soon as possible, similar comments are being discussed in the international press.

In international politics, the US's recent alliance of AUKUS against China, by taking Britain and Australia by its side, is still fresh, while this crisis faced by Beijing has led to the questioning of the international reliability of China's economy, this country's greatest power. Experts draw attention to the fact that the financial system, which is touted as a financial system, is not strong enough. The resolution of the Evergrande crisis, which has spoiled China's global image, will have repercussions on the leveling of the country's possibly deteriorating financial structure and on the success of Beijing's international policies.

Resources we used in this article

Bloomberg. (2021). “China's fear of spillover in Evergrande crisis”, September 16, https://www.bloomberght.com/cin-in-evergrande-krizinde-yayilma-endisesi-2287677, p.e.t.18.9.2021.

Farrer M., Ni V. (2021). “China's Lehman Brothers moment: Evergrande crisis rattles economy”, The Guardian, September 18, <https://www.theguardian.com/world/2021/sep/17/chinas-lehman-brothers-moment-evergrande-crisis-rattles -economy>, set17.9.2021.

Toh M. (2021). “5 things to know about Evergrande, the Chinese business empire on the brink”, CNN Business, CNN Digital Rebranding 2013, September 18, <https://edition.cnn.com/2021/09/17/investing/china-evergrande -group-debt-explainer-intl-hnk/index.html>, set18.9.2021.