The real estate sector amounts to 30% of China’s GDP. Evergrande’s bankruptcy could send shockwaves across the global economy.
Chickens came home to roost for China’s real estate giant Evergrande. The heavily-indebted company eventually filed for Chapter 15 bankruptcy on Friday, ending a two-year failing saga.
Evergrande was the largest real estate producer in China, fueling a housing bubble that finally exploded in 2021. Evergrande revealed it did not have enough assets to repay its enormous debt, forcing a default.
The Chinese government refused to bail Evergrande out, fearing to create a precedent for other “too big to fail” companies. Beijing opted, instead, to guide Evergrande’s collapse by helping close its final dossiers before filing for bankruptcy.
In July 2023, however, Evergrande revealed an additional $81 billion in debt had been created between 2021 and 2022. Its collapse was imminent, and there was nothing the Chinese government could do.
Chapter 15 allows Evergrande to be protected by a United States court, referencing to restructuring procedures in Hong Kong, the British Virgin Islands, and the Cayman Islands. According to Chapter 15 procedures, the US court will protect debtors’ assets in a cross-border filing.
What will happen to China’s economy
The real estate sector is the backbone of the Chinese economy, amounting to 30% of the country’s Gross Domestic Product (GDP).
Evergrande was the country’s largest producer, and its fall might send shockwaves across the entire sector. Another Chinese property giant, Country Garden, is attempting a debt restructuring as it struggles to cash in liquidity.
The Chinese economy is already disappointing most analysts. The post-Covid recovery has largely been underwhelming for the Eastern giant, exacerbating the real estate market crisis.
Second-quarter GDP growth was below expectations, and the country’s manufacturing sector is struggling to meet demand. Trade exports are also crashing down, with a 14,5% annual fall in July.
Part of this crisis is the Western economic downturns, weakening demand for Chinese goods. However, geopolitical tensions with the United States are the biggest culprit.
The Biden administration has been restricting trade with China since its inception, continuing Donald Trump’s trade war. In particular, Joe Biden focused on limiting chip exports to China, widening the technological gap between the two countries.
In response, China recently restricted gallium and germanium exports, two key materials inside modern digital devices.
But China does not have a way out of this war. Microchips are largely produced in Taiwan, the rivaling island off China’s shores and a close American ally.
The Chinese government threatened an invasion of Taiwan many times in the last decade, but never acted upon it partly because it would deprive them of these precious chips. US restrictions aim at preventing Chinese domestic production of chips, forcing them to rely on Taiwan for the time being.
The Chinese real estate sector has been caught in the crossfire. It will likely deepen China’s economic crisis, but will also have consequences on the global economy.
