Evergrande, China's largest property developer, directly employs 200,000 people and indirectly employs 3.8 million people. Problem: the group is bankrupt and announced on September 14 that it is facing a risk of default. Evergrande is crushed by liabilities of nearly 260 billion euros, while it has yet to complete 1.4 million homes with a total value of 170 billion euros. The many homeowners who have paid for the construction of their homes in advance may never see the color of it. On Monday September 13th, angry investors demonstrated outside the group's headquarters in Shenzhen. The shareholders are also in a bad mood, as the shares of the Chinese real estate giant have lost more than 75% of their value.
Beyond the devastated owners and the cheated shareholders, are there any repercussions at the national level and in terms of international finance? Some speak of the "Chinese Lehman Brothers", but what is it really? In recent years, the group has benefited from the credit bubble encouraged by the government: to finance its accelerated growth and to recover from the 2008 crisis, the Chinese government did not use the money printing weapon, as the United States and the euro zone did, but rather the weapon of forced credit, with banks having to provide loans to companies to support activity. This credit-led growth was met with a depression caused by Covid. On the other hand, in order to combat speculation, Xi Jinping's regime has made a 180-degree turn by tightening the conditions for access to credit. Evergrande has been hit hard by this change in economic policy.
The Evergrande developer is not an isolated case. Corporate debt in China has become gigantic and exceeds 160% of GDP, a world record. The collapse of the developer could have a domino effect in China, affecting not only real estate but also the banking sector. In addition, Evergrande bonds are spread across Chinese and foreign funds. European or American investors could be impacted.
But don't worry, the Chinese government will not let this happen, its reputation is at stake! It is not so certain, and that is why we may talk about "Chinese Lehman Brothers". Indeed, Xi Jinping's China is making a brutal nationalist turn, the first sign having been the blocking in November 2020 of the biggest IPO in history, that of Ant Group (better known as Alibaba, the Chinese Amazon), only 36 hours before the scheduled date, its boss Jack Ma even having disappeared from circulation for two months. The other indicator is the repression of democratic movements in Hong Kong. More recently, we learned that the mobile payment champion Alipay (from the Alibaba group) is threatened by Beijing, which is considering splitting the application into two, with mobile payment on the one hand, and credit activities on the other. Above all, Alipay would be forced to transfer its users' data to companies controlled by the state.
Controlling large companies, banning them from being listed on foreign stock exchanges... The wind is turning in Beijing. As the Gatestone Institute explains: "Xi's moves to force China's companies off foreign exchanges could be in preparation for an expropriation of foreign shareholdings in Chinese businesses." This is hardly encouraging for the Western saver and investor, as beyond this developer, their investments in China, or in Chinese assets, could suffer a serious setback. What happens with Evergrande should be followed closely...
Chinese state-media Global Times' editor in chief said struggling #Evergrande should use market means to save itself and should not bet on a government bailout as it deems itself "too big to fail". pic.twitter.com/9v03ZIC2lM— CN Wire (@Sino_Market) September 17, 2021