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A Hong Kong court's recent liquidation order for debt-stricken Chinese real estate giant Evergrande has once again raised the dire question of whether China's economy is a ticking time bomb. Experts continue to ask this question as news about Chinese construction worsens.
Until recently, two rival real estate construction companies, Evergrande and Country Garden, were the poster child for China's booming real estate market. Then things started to unravel. A peek into the register shows that more than 50 Chinese real estate companies struggling with these debts have declared default since 2021. This number now includes both Evergrande and Country Garden.
As sales declined and people stopped buying homes, those who had already purchased real estate saw their promising projects hit delays and closures. Finally, a Hong Kong judge ordered Evergrande to shut down after years of unfulfilled promises about debt restructuring and occasional government cash injections.According to this BBC articlethe judge said “enough is enough” before appointing a liquidator to begin proceedings.
Will it be the final nail in the coffin for Evergrande?
One estimate puts Evergrande's debt at a whopping $300 billion. Construction companies' woes began in 2020, when the government introduced new rules limiting the amount of debt owed by property developers. As a result, companies such as Evergrande have been forced to sell their stocks at deep discounts to prevent a cash shortage. And therein lies the problem. Evergrande was borrowing against future offerings and had trouble meeting interest payment schedules on its debt.
Ultimately, the situation became so volatile that the company's stock lost 99% of its value over the past three years. The company filed for bankruptcy in New York last year before announcing plans to enter into a multimillion-dollar restructuring agreement with creditors.
For Western countries, this crisis inevitably evokes terrifying memories of the 2008 US subprime crisis. For other countries, Evergrande's failure could have a knock-on effect on supplies and suppliers, as real estate was once one of China's main growth engines. (Follow more Chinese macroeconomic trends impacting global metals markets) MetalMiner weekly newsletter). Construction industry news sources were quick to point out that any disruption would hit the uptake of goods needed for real estate construction, such as steel, aluminum and iron ore. Indeed, mining operations and supply chains as far away as Brazil and Australia could feel the aftershocks of China's real estate market collapse. For some, that may be precisely why the Chinese government wants to support this undertaking and ensure the construction project is completed.
Company background and potential impact
evergrande was founded in 1996 by businessman Hui Kar Yan and was originally called Henda Group. According to records, the company currently owns more than 1,300 projects in 280 cities across China. But Evergrande's interests go beyond real estate. Real estate is just one part of the larger Evergrande Group, which has subsidiaries ranging from wealth management to food and beverage to electric vehicle manufacturing. Hui Kar Yan, meanwhile, was once Asia's richest person, with an estimated fortune of $42.5bn (£34.8bn). However, this is reportedly no longer the case.
Experts say much of the expected fallout from a potential Chinese economic collapse stems from two factors. First, if the Chinese government chooses not to intervene and allows the real estate sector to slow down, it will lead to a lending crunch and have a major impact on financial markets. Meanwhile, thousands of suppliers, many of them overseas, will be affected by the slowdown in metal imports. Even companies like Apple and Volkswagen could start losing revenue from the Chinese market as household spending takes a hit. Things will get even worse if the real estate market collapses.
China currently leads more than a third of global growth. U.S. credit rating agency Fitch also recently downgraded its global outlook for 2024, stating that the slowdown in the Chinese economy is “casting a shadow on global growth prospects.”
Construction news source awaits results
Countering these concerns is the view of some economists who feel China's status as a powerhouse of global growth has been overstated. Nevertheless, the adverse impact of Monday's court ruling is bound to affect exporters in Australia, Brazil, and even some African countries.
No wonder economists call China the “factory of the world.” After all, 30% of the world's manufacturing output is generated in this country alone. In 2022, China produced 40 million tons of primary aluminum, more than half of its 68 million tons of primary aluminum production. At the same time, construction news sources report that the country consumes about 55% of the world's aluminum.
Why experts believe the local real estate crisis won't shake up global markets
Several economist Despite the real estate crisis, we believe that China's economy is strong enough to withstand such a blow. In their view, China is an export-oriented economy, although dire construction news may force consumption to slow. Therefore, problems in the local market will not affect the global economy.
From 1997 to 2022, global steel consumption increased from 700 million tons per year to 1.8 billion tons per year, with Chinese demand accounting for most of the increased consumption of 1.1 billion tons per year. The country's growth has been so intense that none other than the World Bank once described China as “the fastest sustained expansion by a major economy in history.”
Whatever the future holds, all eyes are now on the Chinese government. Will it intervene again to stop the dismantling of the real estate sector, as many are expecting? Will we end up bailing out real estate developers like Evergrande, as the US government did in the aftermath of the subprime crisis? only time will tell.
Written by Saurabh Darabshaw
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