Commentary on Political Economy

Friday 17 September 2021

 A Nightmare Scenario

The risks just keep piling up for China.

Delta outbreaks. A regulatory crackdown on big tech. Surging commodity prices and freight costs hammering exporters. Fractious ties with America. And then there’s China Evergrande Group, the​ embattled real estate developer groaning under the weight of a​ $300 billion pile of liabilities.

Evergrande is the latest flashpoint in President Xi Jinping’s battle against​ leverage, following a long line of predecessors which China bears have pointed to as the potential Lehman moment that triggers an economy-wide reckoning after years of excessive credit expansion.

Just a few months ago, it was bad-bank China Huarong Asset Management Co. that was causing all the angst. Before Huarong there was the sprawling conglomerate​ HNA Group Co., and before HNA it was regional lender Baoshang Bank Co. And so it goes.​ ​

But each time, Beijing has managed to contain the fallout and keep the China bears’ dire predictions from materializing. The latest test will come next week: Evergrande’s main banks were told by China’s housing ministry this week that the developer won’t be able to make interest payments due Sept. 20, according to people familiar with the matter. Then what?

While a chaotic collapse remains a distant proposition, Bloomberg News’s Shen Hong,​ Enda Curran​ and​ Sofia Horta e Costa have sketched out what such an outcome would look like. And it isn’t pretty.​

Protests intensify at​ China Evergrande Group​ offices across the country as the developer falls further behind on promises to more than 70,000 investors. Construction of unfinished properties with enough floor space to cover three-fourths of Manhattan grinds to a halt, leaving more than a million homebuyers in limbo.

Fire sales pummel an already shaky real estate​ market, squeezing other developers and rippling through a supply chain that accounts for more than a quarter of Chinese economic output. Covid-weary consumers retrench even further, and the risk of popular discontent rises during a politically sensitive transition period for President​ Xi Jinping. Credit-market stress spreads from lower-rated property companies to stronger peers and banks. Global investors who bought $527 billion of Chinese​ stocks​ and​ bonds​ in the 15 months through June begin to sell.​ ​ ​ ​ ​ ​ ​ ​

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