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The Evergrande Crisis Reflects Greater Rot in China’s Real Estate Sector – Morning Brew

The business world has been captivated by the slow-moving train wreck that is Evergrande, a massive Chinese real estate developer that’s buried up to its penthouse in debt. Investors have feared that because of Evergrande’s size and interconnectedness with other companies, its impending collapse could do its best Covid impression and spread contagion across markets.

The latest: Evergrande was able to make an interest payment on a domestic bond yesterday, but the bigger question is whether it’ll be able to settle a $83.5 million bill due today. If it can’t pay up in 30 days, it could default, which might cascade across the global economy.

Why is it a big deal?

Because in China, real estate is the biggest game in town, and the town is pretty big—China is the world’s second-largest economy. In China, real estate contributes a mind-boggling 29% of GDP (compared to 6.2% in the US in 2018). Building has literally built China into the superpower it is today.

But thanks to super-low borrowing costs, the Chinese property sector has been feasting on empty calories, leading to astronomical debt loads ($300+ billion, in the case of Evergrande) and a chronic oversupply of housing.

  • There is enough empty property in China to house more than 90 million people, according to the Rhodium Group’s Logan Wright. The entire population of France, Germany, Italy, the UK, or Canada could easily fit into those empty apartments.
  • A viral video from last month shows 15 unfinished high-rise apartment buildings getting demolished in a matter of seconds.

Like an angry parent whose credit card was abused by their teenager, China’s government has recently taken steps to limit the amount of debt that property developers can take on. Letting Evergrande implode would show that President Xi Jinping is serious about this crackdown.

Bottom line: Some observers have compared Evergrande’s woes to the epic collapse of the investment bank Lehman Brothers during the 2008 financial crisis. But other experts say this isn’t a Lehman Brothers moment—it could be worse, if you view China’s gargantuan real estate sector as rotten to the core.—NF



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