The Great Debt of China: Evergrande on the brink of collapse?

October 7, 2021

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3 min read

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What's going on here?

Chinese company Evergrande owes $300bn in debt. The company failed to meet a key repayment deadline on Thursday 24 September prompting fears it may collapse, to the detriment of national and global markets.

What does this mean?

Evergrande is one of China’s largest companies. It operates in a variety of sectors such as electric vehicles and manufacturing but is most prominent in the real estate industry. The company has 200,000 employees and assets worth approximately $1.5tn. It is currently operating 1300 projects in 280 Chinese cities.

The company grew to its current size by borrowing billions of pounds from lenders. However, it is now struggling to meet its repayment deadlines. The property giant is due to repay loans to 171 Chinese banks, many of whom will be in grave financial difficulty if Evergrande does not recover.

Evergrande’s financial difficulties stemmed from a change in national legislation. Chinese companies had previously been encouraged by the government to borrow from banks in order to purchase assets and expand. Over the past decade, though, President Xi Jinping has introduced a policy to reduce leverage (excessive debt) held by real estate firms so the country would experience “genuine rather than inflated economic growth”. As Evergrande has been reliant on growing via debt, it has struggled since the new policy came into place. The company’s growth has plateaued, with its share value decreasing by 80% over the past year. This means it does not have resources to repay the $300bn it owes to investors. Evergrande’s  credit rating has also been downgraded, meaning its bonds are worth less to lenders.

What's the big picture effect?

Evergrande’s financial difficulties have already caused issues in China. To raise funds and repay its debt, the company desperately encouraged employees to loan it money. However, those who took part in this supposed investment scheme were not paid back and protested in retaliation. Evergrande has sold thousands of properties off plan (properties sold by developers before they have been built) meaning those who purchased properties not yet built are set to lose thousands of pounds worth of deposits if the company goes bankrupt. The company’s national image has been severely tarnished by these actions. 

There are also larger fears that Evergrande’s difficulties are only the start of the wider collapse of the Chinese property market as many other firms are also reliant on leveraged debt. The Chinese Government therefore faces a great dilemma. Even if it bails Evergrande out, it may still be left with a large-scale debt issue. UBS has calculated there are 10 other Chinese property developers in uncertain positions.

Analysts have compared this situation to the fall of Lehman Brothers in 2008. Lehman was once the US’s fourth biggest investment bank but collapsed after being overburdened with debt. The Lehman collapse contributed to the 2008 financial crisis and there are fears Evergrande’s issues may have similar effects. HSBC CEO Noel Quinn  has called the situation “concerning” for the “capital markets and the bond markets” and there are fears a credit crunch might occur (where it becomes more expensive for banks to lend money).

However, the company has also been labelled as “too big to fail”, with experts such as Mattie Bekink from the Economist Investment Unit reassuringly stating that “the government will probably find a way to ensure Evergrande’s core business survives”. Whatever happens next, the fallout from Evergrande’s debt crisis will certainly be felt and remembered in China, and perhaps even beyond the Great Wall.

Report written by Amber Allen

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