Evergrande, one of the largest real estate developers in China, is currently facing insolvency as it reckons with a whopping USD 300 billion debt. Evergrande is just one company that helped fuel the country's housing boom, in which developers borrowed massive amounts of money to construct apartments, only to now find itself unable to pay its debts and struggling to sell off the properties thanks to new restrictions on housing set by the Chinese government. Recently, Evergrande missed two important interest payments in U.S. dollar bonds, triggering anxieties as to whether the company is approaching default. It is facing increasing pressure from both contractors and employees who are owed money, plus pressure from its buyers whose apartments remain incomplete. It now remains to be seen whether Beijing will bail out the company, or whether it will let it default, which could have ramifications for China's property market and beyond.

 

The booming property market in China bolstered economic growth in the country, but it has been bolstered by false promises that are now crumbling. After decades of reckless borrowing to build more and more properties, regulators are cracking down on such practices at the same time that China is seeing less demand for new apartments. These variables have in turn led to slowed economic growth in China, which further fuels the lack of demand for new housing. Now, Evergrande owes USD 300 billion in unpaid debts and 800 unfinished apartments, with roughly 1.6 million people waiting to move into the homes they were promised. The question now is whether Beijing will step in to save the company; while investors in the past assumed the government would offer a bailout, authorities have more recently shown a willingness to let companies like Evergrande fail in order to tamp down China's debt problem. Were Evergrande to fail, the panic from both investors and home buyers could impact China's economy as a whole by making them less risk-averse, leading to a downturn in the housing market and beyond.

 

1. What are the potential ramifications of Evergrande defaulting on the Chinese economy?
2. Do you think Beijing will bail out the company or let it fail to discourage reckless borrowing? What are the pros and cons of each?

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If Evergrande were to default on its debts it could have significant ramifications for the Chinese e... View the full answer