A man walks in front of a map showing Evergrande's retail complexes across China, at a partially open Evergrande shopping complex in Beijing on Monday. Evergrande was once listed as the world's most valuable real estate company, but on Monday a Hong Kong court ordered the company into liquidation. Greg Baker/AFP via Getty Images Hide caption
Toggle caption Greg Baker/AFP via Getty Images
Greg Baker/AFP via Getty Images
A Hong Kong court has ordered the liquidation of Evergrande Group, the huge, indebted Chinese property developer, after it failed to restructure $300 billion in debt to investors.
Just six years ago, Evergrande was thriving, pre-selling apartments to middle- and upper-class Chinese. In 2018, it was named the world's most valuable real estate company. But just three years later, it's in trouble. Massively insolvent and unable to complete some of its existing projects, Evergrande has become a symbol of a Chinese economy facing major short-term obstacles: slowing growth, rising debt and a shrinking workforce.
Evergrande had been seeking a plan to restructure its $23 billion in debt but those plans were derailed last year after its billionaire CEO, Xu Jiayin, also known as Xu Kayin – once one of Asia's richest men – came under investigation for unspecified criminal activity.
China invests roughly 20-30 percent of its gross domestic product each year in the real estate and infrastructure sectors of its economy.
While Evergrande's collapse is unlikely to have an immediate impact on U.S. consumers, it is a further sign that China's economy, which accounts for about 20% of global GDP, is undergoing a painful slowdown that could lead to slower global growth in the future.
Here's what you need to know:
Evergrande's collapse is a big deal, but it's not like Lehman Brothers
Some are already comparing Evergrande's collapse to the 2008 collapse of Lehman Brothers, a precursor to the Great Recession. The financial giant filed for bankruptcy on September 15, 2008, with $613 billion in debt, setting off a banking collapse that further exacerbated an already struggling U.S. economy.
Lehman's dramatic collapse was due in large part to millions of risky mortgages that propped up a shaky financial system. Homebuyers who couldn't make their mortgage payments were unable to repay their loans, sending shockwaves through Wall Street and putting those borrowers at risk of foreclosure.
But experts who spoke to NPR don't think the global economy will be affected that much.
Evergrande has been slowly heading toward insolvency at least since 2020, when the Chinese government launched a program called the “Three Red Lines” aimed at reducing debt levels in the real estate market. Recognizing that the sector was overheating, the government imposed limits on the amount of borrowing the company could do.
“It worked,” said Dexter Roberts, director of China issues at the University of Montana's Mansfield Center. “Evergrande is the biggest victim of that policy.”
But parallels to Lehman's collapse, which saw total debt rise to $613 billion (in 2008 dollars), are “a bit overstated,” said Roberts, a senior fellow at the Atlantic Council's Global China Hub and author of “Chinese Capitalism: The Future of Workers, Factories, and the World.”
He called the company's collapse a “controlled implosion.”
“China has long recognized that its economy is imbalanced and overly reliant on debt. The real estate industry is one of the most indebted industries, and Evergrande is a prime example of one of the most indebted companies in that industry.”
Scott Kennedy, senior adviser and president of China business and economics at the Center for Strategic and International Studies, agreed that Evergrande's collapse shouldn't come as a surprise to its investors or the world.
He said Evergrande's business model, like that of other Chinese property developers, was to pre-sell homes, an inherently risky strategy that led hundreds of thousands of Chinese to buy homes that were never scheduled and likely never completed.
“At some point, they may not actually be able to complete all of the housing, and ultimately the project will stall and the financing situation will worsen,” Kennedy said.
Many ordinary Chinese are seeing their real estate investments disappear
Chinese households own more than 70% of their wealth in apartments, and while Evergrande's collapse has long been expected, it will come as a blow to some, Mr. Roberts said.
Another small Chinese property developer, Country Garden, has also had problems recently.
“They're very worried because they're watching their one big asset depreciate in value,” he said.
“They own apartments, and in some cases, multiple apartments,” he said. “When you have a downturn in the real estate market, like in China, it creates a kind of negative wealth effect for consumers and discourages them from spending.”
A drawn-out liquidation of Evergrande means that retail investors who just want to buy apartments and large institutional investors “will have to wait in line, and the court will have to decide who gets to the front of the line and who gets paid,” Kennedy said.
Unlikely to have a significant immediate impact on U.S. consumers
Diana Choireva, senior fellow on the Chinese economy at the Asia Society, said Evergrande's investors, both domestic and foreign, will be most affected by Monday's ruling in Hong Kong.
“This is more focused on outside investors,” she said.
So U.S. consumers are unlikely to be significantly affected, at least in the short term: The Evergrande shutdown could take some time, which would soften the impact even further, she said.
Evergrande's lawsuit was filed in Hong Kong, where the company's shares are listed, but Choireba said Guangzhou, where Evergrande is based, “is not one of the three Chinese cities that mutually recognize liquidation orders.”
“As a result, it may be difficult for the liquidators to gain control of Evergrande's subsidiaries in mainland China,” she said, adding that the company's liquidation process “will be protracted.”
Evergrande signals broader concerns about the Chinese economy, the impact of which could be far-reaching.
As the Chinese government comes to realise that the export-led economy on the scale China has built over recent decades cannot continue forever, it has sought to boost domestic consumption to make up for the shortfall.
But Evergrande's collapse could deal a blow to confidence both in and outside of China, Kennedy said. “There's confidence in the company itself and the financial problems that it's gotten into and what that means for the real estate industry,” he said.
“The next question is how much confidence the Chinese people have in the Chinese government's ability to manage this process fairly, calmly and objectively,” he said.
Choireva and others say China's economy faces many challenges and could slip into deflation. China's consumer prices fell at their fastest rate in three years in November.
“The U.S. should look to China because it's a huge economic powerhouse first,” she said. “If there's serious deflation in China, the only option left is [for it] Exporting deflation.”
At first glance, this would seem to benefit consumers who buy Chinese products, but instead it likely means that U.S.-based competitors will have to lower their prices to compete against a flood of increasingly cheaper Chinese products.
“That will lead to business closures, job losses and consumer hardship,” Choireva said.
Roberts shares similar concerns, saying the U.S. and China are “deeply intertwined” and that most of the largest U.S. multinationals “derive a significant portion of their revenues and profits from the Chinese market or have supply chains that begin in China.”
Meanwhile, China is pumping money into manufacturing to make up for its slowing economy.
“in the end, [China] I think they will end up mass producing goods that need to be sold somewhere and selling them cheaply. [that] It could be a deflationary pressure.”