Anyone following the financial papers cannot have failed to read lurid reports regarding China’s Evergrande construction company, which appears on the brink of collapse.
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Chinese markets fall on Evergrande crisis
Indeed, stock markets in China took a heavy fall this week on news that the world’s most indebted construction firm could fail to repay interest coupons due this week and next.
Evergrande was valued at $41 billion in 2020. However, its market capitalization fell to just $3.7 billion now, as it became apparent the highly leveraged company with total liabilities of some $300 billion was struggling to repay a modest onshore interest debt this week.
Evergrande’s woes are merely the symptom of a much bigger problem.
As the Financial Times notes, China’s vast real estate sector, which contributes some 29% of the country’s gross domestic product, is so overbuilt that rather than leading as China’s prime driver of economic growth, it is fast becoming a drag on it.
According to the Financial Times, there is enough empty property in China to house over 90 million people. To put that in perspective, there are five G7 countries – France, Germany, Italy, the U.K. and Canada — that could fit their entire populations into those empty Chinese apartments, with room to spare.
Oversupply has been a problem for several years. But after much prevarication, President Xi Jinping has formulated three red lines to reduce debt levels in the sector. While by no means the only perpetrator, Evergrande has failed all three red lines. Those lines are the ratio of liabilities to assets, of net debt to equity, and cash to short-term debt.
However, it is simply the first and largest to be thrown to the wolves as an example to the rest.