The Evergrande Debt Crisis: Evergrande is one of China’s largest corporations, a sprawling conglomerate with interests ranging from real estate to electric vehicles and investors from all over the globe. The size and scope of the conglomerate make it the very definition of “too big to fail.”
However, Evergrande owes more than $300 billion and, despite having made at least one payment to its creditors, is at risk of bankruptcy, which would be calamitous for the Chinese economy and cause ripples in the global financial system.
Roselyn Hsueh, an associate professor of political science and author of the forthcoming book Micro-institutional Foundations of Capitalism: Sectoral Pathways to Globalisation in China, India, and Russia, spoke with us about how Evergrande became the most indebted real estate developer.
The Evergrande Debt Crisis: The Temple What is Evergrande and what is it used for?
Roselyn Hsueh: Evergrande is a real estate developer with numerous subsidiaries that was founded in 1996 in the province of Guangzhou by a Southern Chinese entrepreneur. It has developed over the years into a massive holding group that is listed internationally in Hong Kong and registered in the Cayman Islands. There are numerous subsidiaries and types of enterprises within the group, including renewable energy businesses.
Evergrande is likely one of the top three largest Chinese corporations and real estate developers in China. And with the default, which has already begun in part, it will be the largest real estate corporation in history to default on international loans.
How did this transpire? How did the business enter a financial crisis?
Evergrande’s fate is heavily influenced by the manner in which the Chinese government has liberalised the economy since 1978’s “open door policy” and China’s ensuing accession to the World Trade Organisation in 2001. It is essential to consider how Evergrande could have been founded in a state-controlled economy, as is commonly believed. When the Chinese government began liberalising the country’s economy, it retained strategic assets and industries on the one hand, but decentralised very broadly, ceding control over the non-strategic parts of the economy to local government and business stakeholders. This implies that a substantial portion of the Chinese economy has been decentralised to the provinces, municipalities, and towns and villages.
Xu Jiayin, the owner of Evergrande, grew up in what I call a bifurcated capitalism: On the one hand, there is the state-controlled economy, and on the other, there is the introduction of private and municipal state competition.
However, one of the unintended consequences of decentralising and deregulating was that it did not necessarily create a structure capable of regulating specific sectors of the economy. Consequently, there are a large number of new stakeholders, a large number of government and private entrepreneurs (many of whom may have been state employees or Chinese Community Party members) who are operating in an economic sector that is essentially the Wild West.
And now we have Evergrande, a massive real estate company with international institutional and individual investors around the globe, which is likely to lose a great deal of money. This could represent the entirety of some institutional stakeholders’ and private investors’ financial well-being. This is because a portion of China’s economy has been left to the whims of numerous competing interests and has not necessarily been well-regulated.
The Evergrande Debt Crisis: Why are Chinese individuals concerned about the prospect of Evergrande defaulting?
Individuals, decentralised local stakeholders, and the central government are all extremely anxious. Evergrande’s economic influence has only grown over time. Its reach extends beyond the southern Chinese province of Guangzhou. It genuinely reaches the majority of China’s provinces and numerous cities and towns. And when so many of China’s 1,4 billion citizens are affected, the Chinese government and its leadership are concerned for political stability. There is a threat to the legitimacy of the Chinese Communist Party. What had previously been a local, decentralised issue is now a national issue.
There are already reports indicating that the Chinese government has begun to take action. State-owned institutions have acquired a portion of Evergrande’s assets and liabilities. Evergrande, which has been primarily a private enterprise until now, will now receive financial assistance from the state. The Chinese government will have centralised control, which could be problematic for Evergrande’s diverse stakeholders, including global ones.
How is the Evergrande situation affecting international financial markets?
An international listing implies that business dealings should be transparent. One of the most common complaints, however, is that there has been a great deal of obscurity surrounding Evergrande’s operations over the past several years, and even now with the intervention of the central government. This is problematic for international stakeholders because they are unaware of the situation. Moreover, it appears that the Chinese government will prioritise Chinese stakeholders over international ones in any rescue efforts. For this reason, global stakeholders are anxious. Globally, individuals are anxious at various levels of business and financial authority.
The Evergrande Debt Crisis: What’s next for the business?
A significant portion of the outcome will depend on central-local relations in China. Due to the decentralisation of markets, the central government of China will have to deal with a multitude of stakeholders, including local governments. There are local authorities that must be accounted for. What occurs next will have implications for the destiny of China’s two-tiered capitalism. And there may be an increase in central intervention and control. At the same time, the Chinese government may determine that local governments should still have a stake. In this case, Evergrande might strike a succession of deals with local governments, some of which will likely prioritise domestic stakeholders. This does not imply that global constituents will be completely excluded from consideration; rather, they may not be prioritised in the near future.
