The Chinese firm Evergrande (a Fortune Global 500 Company) has recently missed a required interest payment, a development that sent shockwaves throughout the global financial community. In fact, with roughly 300 billion dollars in debt, the firm could well be on the brink of collapse, prompting many economists to liken it to the fall of the Lehman Brothers, which didn't end well for anyone. Whilst the situation alone is a story in and of itself, the fate of Evergrande will reflect the future of the Chinese economy. Will Beijing choose to rescue the stagnant behemoth or let it collapse?
For a long time, the real estate firm has been symbolic of all that Modern China offers. In a classic 'rags to riches story, Xu Jiayin founded the company in 1996 after working in a steel factory for ten years. Due to the increased demand for property and, crucially, the firm's insatiable appetite for investment, Evergrande grew at a meteoric rate. Mr Xu began to ingratiate himself with the higher-ups of the Chinese Communist Party, enjoying a very lavish lifestyle and reaping the rewards of his newfound political influence. Meanwhile, the Chinese property market represented a third of the economy, and Evergrande created over 3.3 million jobs per year.
Frasier Hower, an expert on Chinese economics, noticed the unsustainable growth of the "red-hot" Chinese real estate market, which made firms such as Evergrande, who'd been relentlessly pumping money into their operation for over a decade, susceptible to a slump. The debt was piling up and, as demand for property began to plateau, the firm started to flounder. This decline culminated in a failure to pay international bondholders $83.5m that was owed to them in interest payments.
The question now is whether or not the Chinese government will bail them out. On the one hand, doing so would give the green light to companies seeking to accrue a large amount of debt in exchange for rapid growth. This would reinforce the myth that some firms are 'too big to fail,' a tale that can breed economic catastrophe, as most of us are aware. On the other hand, the collapse of Evergrande would affect individual consumers, small businesses and investors who would see their money disappear. In addition, there are currently about 1.6 million buyers waiting for unfinished property, many of whom have parted with a large amount of money; a lack of intervention from the CCP would leave them with no support.
As infallible as they often seem, the latter option could seriously endanger the public image of the CCP. To a degree, there's always been an unspoken agreement between the CCP and the Chinese people: 'we'll give you unprecedented economic growth, jobs and stability if you allow us to control or monitor every facet of your life.' Of course, this is an exaggeration, but the fallout from a potential collapse really could spark public unrest, which isn't ideal from the CCP's perspective. Ultimately, as I'm writing this, nobody knows how this dilemma will be resolved, but it'll be interesting to see the outcome of China's very own 'Lehman moment.'
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