There was a time when Evergrande Group stood out as a symbol of success and ambition in China. With a massive portfolio of construction projects and a dominant soccer team, the company represented the nation’s aspirations for greatness. However, the recent bankruptcy filing and subsequent arrest of Evergrande’s chairman, Xu Jiayin, have brought the real estate giant’s ignominy to the forefront. This blog post delves into the rise and fall of Evergrande, the broader economic implications for China, and the complex challenges ahead.
The Rise of Evergrande: From Real Estate to Soccer Dominance:
Evergrande Group’s journey to prominence began as a major player in China’s real estate sector. With over 1,300 projects across 280 cities, the company quickly became the largest constructor in the country. Beyond real estate, Evergrande ventured into the world of soccer, where its team, Guangzhou Evergrande, secured an impressive record of achievements. With eight Chinese Super League titles and two Asian Champions League victories, the club boasted a roster of highly paid international stars. Evergrande even spearheaded the world’s largest soccer school, aiming to revitalize Chinese soccer and produce national talent.
Changing Fortunes: From Glory to Bankruptcy:
The allure of investing in soccer aligned with Chinese President Xi Jinping’s vision of developing grassroots soccer and hosting the World Cup. Evergrande’s support extended to financing the salary of former Italy manager Marcello Lippi, who coached the Chinese national team. However, the company’s financial troubles surfaced in 2020, against the backdrop of a housing slump and regulatory interventions targeting excessive liabilities. As a result, Evergrande’s shares plummeted by 99%, wiping out a staggering $47 billion in market value. The subsequent bankruptcy filing and Xu Jiayin’s arrest further highlighted the dire economic troubles faced by China.
The Broader Economic Crisis:
Beyond Evergrande, China’s economic woes have been exacerbated by a series of high-profile purges and investigations, instilling uncertainty among investors and foreign companies. The restrictive controls on data export, ideological study sessions for bankers, and limitations on foreign executives leaving the country have taken a toll. In fact, foreign direct investment into China dropped by a significant 94% in the second quarter of this year. Xu Jiayin’s arrest adds to the unease, as it signals potential challenges in cross-ministry coordination and foreign investor confidence.
Beyond Evergrande’s Collapse: The Wider Implications:
The repercussions of Evergrande’s downfall extend far beyond the company itself. An estimated 1.5 million customers face the anguish of unfinished homes, while the crisis reverberates through the broader economy. As real estate constitutes a substantial portion of China’s GDP and household wealth, the consequences are extensive. Property developers, collectively burdened with over $390 billion in debts, strain suppliers and ordinary individuals and firms.
Addressing the Crisis: Painful Corrective Measures:
Analysts agree that a painful correction is necessary before China can emerge with a revamped real estate sector focused on actual needs rather than speculative investments. China’s approach involves allowing certain poorly managed firms to wind down, while supporting well-run companies with benefits such as foreign currency loans and domestic bond guarantees. However, even these seemingly stable firms, like Country Garden, find themselves in distress due to the severity of the crisis.
Understanding the Crisis’ Roots:
A combination of factors has contributed to China’s real estate crisis. Chinese culture tends to prioritize property investment as a store of value, driving demand for real estate over other forms of investment. Investment in the construction industry was fueled by government stimulus after the 2008 financial crisis, resulting in overcapacity in sectors such as steel and cement. When regulators attempted to restrict credit flow to the property sector, shadow banks stepped in, leading to an eventual credit crunch in 2020.
Challenges Ahead: Striking a Balance:
China’s efforts to stimulate house purchases by reducing interest rates and bureaucratic obstacles are necessary but not sufficient. Housing prices must also decrease to attract buyers. However, local governments are wary of falling prices, as they threaten investor confidence and strain already debt-ridden budgets. Striking a balance between lowering prices and maintaining stability remains a significant challenge. Furthermore, the prevalence of new builds and pre-sale models, coupled with the decimated confidence in the sector, further complicates the task.
The collapse of Evergrande serves as a stark reminder of the inherent risks in China’s real estate sector. From its soccer ambitions to the broader economic implications, the challenges faced are multifaceted. To navigate this crisis successfully, China must address the root causes, initiate painful yet necessary reforms, strike a balance between market control and free-market principles, and ensure social stability. Only then can the country build a sustainable real estate sector that aligns with its economic goals.
Market Capital Research 