The World Today for October 14, 2021

NEED TO KNOW

Pop Goes the Bubble

CHINA

China’s real estate bubble is bursting.

As Reuters explained, Evergrande has acquired $300 billion in debt but missed more than $130 million in payments since late September. The 30-day grace period for nonpayment is set to expire soon. The company, Bloomberg wrote, has not been especially communicative about its plans while Chinese officials have signaled that they don’t intend to bail out the company. Bondholders fear China Evergrande Group will default on its debt payments.

Evergrande borrowed excessively, grew quickly and provided opaque reports that concealed its financial condition, the Wall Street Journal reported. Regulators, government officials and investors seeking to cash into China’s $52 trillion property market helped keep the company going, even when shoddy construction and corruption became rife in the industry.

Then Chinese leaders in Beijing adopted reforms that undercut Evergrande’s house-of-cards business model. The new rules curbed excessive borrowing and emphasized the sale of affordable homes to average families rather than luxury units, the Australian Broadcasting Company wrote. Evergrande responded with deep discounts that shrunk cash flow.

The prospect of a massive Chinese real estate developer imploding is casting doubts about the strengths of the world’s second-largest economy, noted the Guardian.

Many fear that a crisis in the Chinese real estate sector could trigger a worldwide financial crisis in the same manner as the 2008 financial crisis, which began with the real estate market collapsing in the US. Goldman Sachs, for example, has warned of local Chinese governments also potentially defaulting on payments related to $8.2 trillion in debt amassed over the years to fuel the construction of skyscrapers, roads, bridges, stadiums and other infrastructure, Forbes added.

The second-largest shareholder in Evergrande, a company called Chinese Estate Holdings, saw its share price plummet by 44 percent. Chinese Estate Holdings opted to take the company private, a move possibly designed as a way to escape a coming storm in the market, reported CNN. Fantasia Holdings, a luxury property developer, also recently garnered headlines when it announced it would miss a $206 million bond payment, according to Barron’s.

Financial Times columnist Martin Wolf recently argued that Evergrande would not sink China or the world economy but that the crisis showed how the Chinese economy was too dependent on real estate. He wondered how Chinese leaders could create a transition away from this dependency. “(It would) impose a huge adjustment and create a big headache for the authorities: what can replace property investment in creating demand?” Wolf opined.

It’s a task that could be the challenge that eclipses all others for this generation of China’s leaders.

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