The liquidation of Evergrande will have ripple effects on China and the rest of the world.
The final chapter of Chinese property developer Evergrande started on Monday when a Hong Kong court forced its liquidation. Evergrande is the world’s most indebted real estate company, and its liquidation will send ripples through China’s ailing economy.
The whole crisis started in 2021 when Evergrande (then China’s largest real estate company) defaulted on its offshore debt. What many in the West would have considered a company “too big to fail”, in China it was looked at with disdain by the central government.
After several attempts at restructuring the company, Evergrande eventually filed for bankruptcy in a New York court in 2023. After a final plan drawn up in September failed, Evergrande had no prospect left but liquidation.
At the moment, Evergrande owns $240 billion in physical assets and will complete its near-term projects. Its liquidation will likely take a long time, as domestic and international investors have lost trust in the Chinese real estate market.
The question of liquidation also opens an unprecedented chapter for China. Most of Evergrande’s debt is in offshore obligations, meaning the proceeds from the liquidation need to go to foreign investors.
However, China’s ideological and geopolitical conflicts with Western countries could make this process difficult. Beijing could unilaterally decide to freeze these funds, using them to stimulate internal demand instead. An unlikely prospect, but a very real possibility: Western investors never had to deal with a Chinese real estate bubble, and have no idea how the CCP might react.
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China’s economic crisis
Evergrande’s liquidation comes on the backdrop of the worst economic crisis in decades for China. The post-pandemic growth has been disappointing, with the country battling deflation, high unemployment, low trading activity, and the world’s worst demographic crisis.
Although China managed to reach its goal of 5% yearly GDP growth, economists believe it will not be sustainable in the long term.
The real estate market amounts to 30% of China’s GDP, and over two-thirds of household income. According to some experts, Chinese developers built more homes than the country’s population capacity.
A real estate bubble is nothing new. Many developed economies had to face similar hardships and successfully navigated through them.
The real question is how these crises will affect Chinese policies. If the country continues its path toward isolationism and conflict with the West, similar issues might complicate things further.
At the same time, Western economies are suffering from China’s closure. Germany, one of Beijing’s main trading partners, is currently facing a recession also because of smaller trading activity with China.
