Is the Evergrande Crisis the Beginning of the Next Global Financial Crisis?

Investors are nervous and the Chinese economy hangs in limbo as Chinese real estate company Evergrande struggles to pay back its debt. Taking advantage of China’s mass urbanization since its establishment in 1996, Evergrande has borrowed massive amounts of money and sold investors prepaid apartments to become one of China’s largest companies. In the process, they have accumulated over $300 billion of debt and the financial interests of countless Chinese homeowners. When Evergrande recently missed two payment deadlines on September 23 and September 29, it was only natural that chaos ensued. Although Evergrande still has a 30-day grace period for each payment, which other Chinese companies have used successfully in the past, its debt crisis has led tensions to a fever pitch.

Currently, Evergrande’s debt problem greatly affects its investors and employees. Investors are angry at Evergrande for the many unfinished apartments that they have prepaid for and employees have received pay cuts so that Evergrande can raise money to repay their debts. In September 2021, both investors and employees gathered outside of Evergrande’s headquarters to protest. Investors and employees are hardly the only constituents affected by Evergrade’s financial rut, though. In addition to being a real estate company, Evergrande has grown to also manufacture electric cars, food, and drinks and conduct business with many other firms and companies. Therefore, many other companies and industries beyond real estate would also be affected if Evergrande were to fail to pay back their debt.

If Evergrande defaults—that is, fails to complete the payment by the end of the 30-day grace period—banks and lenders would be forced to lend less money and interest rates would skyrocket and pose a tremendous hindrance to China’s economy. Even if Evergrande is able to pay back their debt, the panic caused by the crisis may affect the prices of property and the confidence of property buyers. Evergrade’s failure to meet its payment deadlines will ripple outward to adversely affect numerous constituencies.

A potential reason Evergrande was able to borrow so liberally and accumulate this extensive debt to begin with is its reputation. Xu Jiayin, the founder of Evergrande, is a member of a group of well-connected advisors called the Chinese People’s Political Consultative Conference. Because of Xu’s status, many investors likely felt it safe to continue investing in Evergrande. In recent years, however, the government has implemented new regulations that place an upper bound on large real estate developers’ holdings. As a result, Evergrande has had to sell portions of its properties and cease construction on other projects. China’s economic growth has also declined, leading to a lower demand for Evergrande’s apartments.

Evergrande is not without mitigation strategies, however. Hoping to raise money to repay debts, Evergrande sold their stock in Shengjing Bank Co. Ltd. in September 2021. Chinese government authorities have encouraged other firms and developers to purchase assets from Evergrande to decrease the risk of economic collapse. Local governments have also been asked to calm the populace and reduce the impact of Evergrande’s downfall on investors. Such measures have nonetheless failed to prevent short-term losses. Because of investors’ panic, Evergrande’s bonds have now traded for as low as 25 to 50 cents on the dollar.

Some have compared the Evergrande crisis to that of the Lehman Brothers, a U.S. investment banking company which contributed to the global financial crisis of 2008. During the global financial crisis, many investors took on risky subprime mortgages to invest in homes, much like the investors who have purchased Evergrande apartments. Mortgage lenders then sold these subprime mortgages to investment banks, causing the banks to take on massive debt not unlike that which plagues Evergrande over a decade later. As the demand for housing decreased, investors were unable to pay back their debt and banks declared bankruptcy. Evergrande faces grave consequences if it fails to navigate its current crisis judiciously.

While Evergrande still has a 30-day grace period for both missed payments, it still faces many problems. From angry investors and employees to decreasing stock prices, Evergrande’s problems could have a devastating outcome if not handled well. Still accumulating debt from its marred reputation, government regulations, and low demand, Evergrande’s downfall would bring countless investors and companies with it. Only the ensuing months will reveal whether Evergrande collapses or recovers.

By: Eric Wang