China’s largest real estate developer, Evergrande, could plunge the country into a years-long recession.
China’s faltering real estate giant Evergrande reported $81 billion in losses in two years, raising growing concerns about its financial stability. Evergrande is the world’s most indebted real estate developer.
In 2020, Evergrande was one of China’s most important companies, holding most of the country’s foreign assets and amounting to the largest real estate market share. Evergrande has been consequential for China’s enormous economic growth in the past two decades, with a housing market boom unparalleled anywhere else in the world.
But the foundation of this growth was not as solid as it seemed.
The city of Ordos, for example, is an ominously empty megalopolis dispersed in Inner Mongolia. Dozens of skyscrapers and wide urban highways were built to host approximately 10 million people, but today fewer than 2 million inhabit the city.
Ordos is a striking example of how the Chinese real estate market was built on a speculative bubble. Investors living on the rich Pacific coast bought thousands of houses on the inside, hoping to resell them at higher prices.
Evergrande was one of the most important players in the real estate scheme and, as it often happens, eventually the bubble burst.
A controlled collapse
When, in 2021, Evergrande defaulted on three offshore bonds totaling $148 million dollars, it was clear the company was doomed to failure.
Evergrande pleaded for a bailout from the Chinese Communist Party, getting rejected as it would have set a dangerous precedent for other indebted companies. If Evergrande was "too big to fail", its collapse would have to be systematically controlled.
The company’s $350 billion in assets would need to repay the remaining liabilities, which amount to $340 billion in 2023. In the two years since the crisis, Evergrande’s debt has risen by $81 billion.
It is reportedly hard to turn the remaining assets into cash, Evergrande’s yearly report shows. The risk of the company’s imminent default is always there.
At the end of 2022, Evergrande owned $256 billion in assets, far fewer than the year before. However, it was still enough to lead to a nationwide crisis if it collapsed suddenly.
The Evergrande crisis is emblematic of overall economic stagnation in China. GDP and trade activity continue to miss expectations as the country follows hard isolationist policies.
The United States trade war is putting China in a financial corner. In the near future, the financial conflict between the world’s largest economies will worsen China’s global position.
2023 will be a year to forget for China.
