China’s stark dilemma over stricken property giant

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Unless you spend time reading the business pages, you may not have heard of Evergrande, the Chinese property developer making global headlines for all the wrong reasons. With more than $US300 billion ($413 billion) in liabilities, more than many nations, its share price has plummeted as it has been forced to scramble to raise enough funds to pay its many lenders, suppliers and investors.

Real estate and related industries account for as much as 30 per cent of China’s economy. During the past two decades, the country has achieved enormous growth on the back of the expansion and urbanisation of China’s middle class. Founded by Chinese billionaire Xu Jiayin, Evergrande has been at the forefront of this transformation.

China watchers are gaming out worst-case scenarios if Beijing allows Evergrande’s downward spiral to continue unabated. Credit:Bloomberg

But the company’s growth has been buttressed by a financial system that has allowed unrestrained borrowing. Now, interest payments on some of these debts are falling due and there are questions about whether it can pay.

While some believe that the possible collapse of the property giant might be able to be contained, others warn we face a repeat of the bankruptcy of US global financial services giant Lehman Brothers, which triggered the 2008 global financial crisis. It is unclear how much this might affect the global economy, but it is already causing jitters well outside China’s borders.

Beijing’s concern over the financial state of Evergrande has been evident for some time. In August it demanded the company lower its debt burden. But in a case of too little too late, Evergrande has been unable to sell off assets (it also has a stake in electric cars, bottled water and sports) and has begun defaulting on interest payments.

With growing alarm that the company’s demise could ripple through the Chinese economy, the People’s Bank of China has injected tens of billions of yuan into the financial system to stave off fears of a broader collapse.

But there are nearly 800 unfinished projects in more than 200 cities across China and Age business columnist Stephen Bartholomeusz has written that local government authorities have been told by the central government to put together taskforces of accountants and lawyers to examine Evergrande’s operations and finances and prepare for “mass incidents”, including protests by Evergrande home buyers waiting for unfinished apartments. Hundreds of small businesses, creditors and banks are in danger of losing their money.

The possible collapse also reflects a seismic shift in China’s economy that is being driven by demographics. While it was overturned in 2015, China’s one-child policy dramatically slowed decades of population growth. Some reports predict the population could begin to drop from next year, and that by 2100 it could fall to 730 million from the current 1.41 billion.

“This is the beginning of the end of China’s growth model as we know it,” said Leland Miller, the chief executive officer of consulting firm China Beige Book, in The New York Times. “The term ‘paradigm shift’ is always overused, so people tend to ignore it. But that’s a good way of describing what’s happening right now.”

This shift is going to put the Chinese government under huge stress in coming years. In the state capitalist system that has evolved over the decades, while private enterprise has been allowed to thrive, it has always been under the watchful eye and guiding hand of the communist state. Evergrande’s demise would put that to the test.

If the state allows the developer to sink, it will be a substantial financial blow for millions, and possibly trigger a wider crisis. But if the government decides to prop the company up, it will be supporting a business model it knows is no longer in China’s best interest.

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