Evergrande: The real estate bubble that burst and put China in deep trouble. World

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In a complex geopolitical context, with multiple ongoing conflicts, and strained relations between Washington and Beijing, portraying China as a power close to bankruptcy helps a lot in the media war. But neither is its economy in complete crisis nor are things going smoothly. And what happened to Evergrande, one of China’s largest real estate companies, is an example of this.

On Monday, a Hong Kong court ordered its liquidation after it failed to restructure nearly $330 billion of debt with its foreign creditors, a matter that could come into 2021 when the real estate developer is set to default on its loan payments. Started.

It remains to be seen whether the Hong Kong decision will complicate Evergrande’s operations in mainland China, given that it is a semi-autonomous territory with different laws, but there is no doubt that the court’s decision will not be ignored. Can be given because the chairman of the company himself is under house arrest. -And with unknown whereabouts- since September last year.

Is it possible that the liquidation of a real estate company will shake up the giant Chinese economy? There are many answers these days, but what has happened with Evergrande is certainly affecting the country, considering that it was one of the largest and most symbolic companies in a key area of ​​Chinese development. , which it represented. – At its most euphoric – even a quarter of its GDP.

“This crisis is a difficult blow to the Chinese economy and a shift from its previous uninterrupted growth. This could lead to a slowdown in construction activity, job losses and reduced consumer spending,” Diana Diaz Martínez, business development manager in Latin America for international consulting firm Mauve Group, explains to El Comercio.

empty tower

The real estate boom in China went hand in hand with the massive urbanization the country has experienced since the mid-90s.

“China went from a 30% urbanization rate to almost 70%. This process, which lasted about 35 years, took about 80 years in other countries. And this process of massive urbanization had a lot to do with its export process, as people who moved from rural areas to the cities became working hands. Of big industries and factories,” recalls Marco Ortiz, professor in the economics department at the Universidad del Pacifico. For this reason, at the beginning of the new millennium, China experienced brutal economic growth and many Western companies decided to transfer their factories to Asian giants to reduce costs.

Thus, during this real estate boom, the Chinese – who now had better purchasing power – paid for their new homes before they were built, allowing construction companies – who did not have as much regulation – to finance their projects on credit. Got permission. However, companies became increasingly indebted as they continued to fill cities with apartment and office towers.

In 2020, the Beijing government decided to tighten conditions for real estate companies to make their costs transparent so they can access loans, but this drained many companies of liquidity.

Although Evergrande was one of the first to raise the alarm signal, especially due to its size and importance, other smaller companies began to go bankrupt and abandon their construction work, leaving thousands without a home, who had previously Had already paid advance for them.

Domino effect

In 2021, when Evergrande could not repay its first loan, the real estate market trembled and many feared that there would be a huge wave that would impact the fate of the Chinese economy, taking into account that the government has Gave to investment.

But we should not forget that amidst this situation, China remained under a strict ‘zero Covid’ policy for two years, which kept a large part of the country confined due to the pandemic.

However, despite predictions of lower figures, the Chinese economy will grow 5.3% in 2022. This does not mean that the economy is not currently in recession, there is a risk of deflation, low wages and less foreign investment due to distrust and uncertainty.

“The real estate market is a good thermometer of how a country’s economy is doing. The region not only generated the crisis, but also reflects the impact of the crisis on China. It’s part of the diagnosis,” Ortiz says.

According to analysts consulted, the scenario should not be so pessimistic. “China is unlikely to enter an economic crisis, but its growth will slow. The Chinese government has demonstrated a track record of taking effective measures to reduce financial risks and stabilize the economy. However, its inflexible focus on the role of the market versus the state and tensions in the financial and real estate markets could create significant instability in the years to come,” predicts Díaz Martínez.

“Growth at 5% shouldn’t be a crisis,” says Ortiz. “It’s a structural issue because China was already reaching its peak. “Markets were already expecting the country’s growth rate to slow.” Rather, he explains, what happened at Evergrande can be described as a catalyst, an event that forces everyone to reevaluate what is going to happen with China.

Last October, during the presentation of the Global Financial Stability Report, the IMF expressed its concerns about China’s financial situation and called on the country’s authorities to “restore confidence in the real estate sector”, as it faces broader pressure on other sectors. Can produce impact.

For Díaz Martínez, the liquidation of Evergrande could affect the confidence of financial markets and lead investors to bet on safer alternative destinations.

“International investors don’t really look long term, and all of this creates a lot of uncertainty about growth rates going forward, which is why many think a break is being marked,” Ortiz says. “

With all this, what happened with Evergrande could be a turning point that will allow us to readjust the destiny of China, a giant that already knows how to weather other storms and He is, without a doubt, unwilling to give up his position. Easily the second largest economy in the world. World.