China’s Evergrande crisis a ‘whole different situation’ than US’ 2008 housing collapse, analyst says
Real estate giant Evergrande, which faces over $300 million in debt, says it will pay interest due Thursday to bondholders in China, but gave no sign of plans to pay on a separate bond abroad. Jeremy Goldkorn, editor-in-chief of SupChina, joined The World’s host Marco Werman to discuss the situation.
Think back to 2008. Things were humming along with the global economy and then bang! The bottom fell out of the housing market in the United States. People couldn’t pay their loans. And you know what happened next.
There’s growing fear something like that could play out again, this time starting in China. One of China’s largest real estate developers, China Evergrande, is on the brink of insolvency.
Evergrande, whose struggle to avoid defaulting on billions of dollars of debt has rattled global markets, says it will pay interest due Thursday to bondholders in China, but gave no sign of plans to pay on a separate bond abroad.
The Chinese government, meanwhile, added to investor anxiety Wednesday by staying silent about whether it might intervene to restructure Evergrande Group’s $310 billion debt.
Economists say Beijing can prevent a Chinese credit crunch but that it wants to avoid appearing to arrange a bailout while it tries to force other companies to reduce reliance on debt.
Jeremy Goldkorn, editor-in-chief of SupChina, has spent two decades in China as an editor and entrepreneur. Goldkorn joined The World’s host Marco Werman to discuss the latest.
Marco Werman: The company is now $310 billion in debt. What happened?
Jeremy Goldkorn: Well, it’s an enormous, sprawling empire. It started in 1996 when Chinese real estate, commercial real estate, was in its infancy. And over the last decade, Evergrande has gone into all kinds of businesses. So, it has what was a health division but now is supposed to make electric cars. And it’s released six models, although it hasn’t actually sold any of them. It has financial products. It has all kinds of investment products that target both its employees and its customers as well as outside investors. It owns a soccer club. So, it’s an enormous company, and it’s very difficult to understand exactly what it owns and perhaps more importantly, what it owes.
But first and foremost, it’s a real estate giant, residential and commercial, right?
That’s correct. That’s how it made its money and that’s still its biggest and real business.
Will China Evergrande be able to meet the bond payments do this week?
The news today was that they have negotiated some kind of settlement with one of the bond payments that was due this week. So, it looks like an immediate disaster has been forestalled. I would also say that much of the sort of financial chattering classes seem to have regained their confidence about the Chinese government’s ability to handle this. And I think there’s a little bit too much eagerness perhaps in the media. We are partly to blame to try and put this Evergrande crisis onto a global financial crisis template, onto the American subprime crisis, to look at it through the same lens. And it’s a whole different situation, a very different government, a very different market, a very different social situation.
How important is Evergrande to the Chinese economy as a whole?
It’s important. It is, if not the biggest, one of the biggest companies. It has got its fingers in all kinds of industries. All kinds of entities are involved from state-owned banks to, you know, the person on the street who owns an apartment and has put their lifetime savings into wealth management products offered by Evergrande. So, it is important to the Chinese economy, but it is not essential. China can very much get by without an Evergrande. So, the government probably has various ways to ease the pain of what looks like is going to be either a quick or slow collapse.
Back in 2008, we were introduced to the phrase “too big to fail,” referring to American banks that were bailed out by Washington. Is Evergrande too big to fail? And would Beijing help it out the next time it’s in a serious bind like this?
I think it might be too big to fail, but I think that the Chinese government is probably going to use this as a signal, particularly to the private sector, that there are not going to be any more bailouts and that everybody responsible is going to pay one way or another for this crisis.
I read that Evergrande has over 1 1/2 million unfinished apartments in China. Is there a chance that they’ll never be finished and would the buyers lose their money?
There is the chance that they will never be finished. Just recently, there were images circulating on the Chinese internet of an enormous development in Kunming, Yunnan province, in the south that was never finished because the developers ran out of money and they had to implode all the buildings and destroy it. A lot of people must have lost money. So, if the government thinks that there are enough people that it could cause some kind of social crisis, they might step in and bail out the little guy. But on the other hand, they’re likely to be customers and retail investors who are very angry by the end of this saga.
Are Evergrande’s problems a signal of something larger in China, a certain fragility, maybe?
Yes, they are. And the signals have been going for quite some time. Evergrande is in the news, and everybody’s talking about it this week. But there have been signals of some kind of disease in the corporate body for many years, ranging from the soccer club to the electric car company with six models that have never been produced. So, there’s been a lot of signs for many years that Evergrande has troubles and that all is not as good as it sometimes seems.
This interview has been edited and condensed for clarity. AP contributed to this report.
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