Evergrande: Is China dropping the staggering real estate giant or is it “too big to fail”?

Is China facing a “Lehman Moment”? A bankruptcy that puts banks in trouble and first infects China and then the global financial system? The term “Lehman” comes up again and again these days when people talk about China and the real estate company Evergrande. And the dispute among experts and China connoisseurs shows one thing above all: How opaque and incalculable the government in Beijing still is, which has been campaigning against its own tech industry for months. “China’s leadership collides with economic reality,” warned US investor George Soros. Evergrande’s problems “could cause a crash”. The news service “Bloomberg” speaks of an “Endgame for Evergrande”.

So the question is: what is “too big to fail” in China?

The background is an imbalance that has it all: The real estate company Evergrande will probably not be able to service interest rates next week and could go bankrupt. Founded in 1996, the company has an astronomical debt and liability of $ 300 billion. Ninety percent of this debt is held by Chinese banks. This year alone, Evergrande has yet to make interest payments of around $ 670 million.

Evergrande is an empire backed by the once richest man in China: Hui Ka Yan. According to its own information, it has supervised 1,300 construction projects in 280 cities, almost 250 subsidiaries, many of them in tax havens like the Cayman Islands. The real estate company not only builds houses and apartments, it has invested in a football club, in theme parks, media, consumer goods such as mineral water and baby milk, and even in electric cars. Evergrande New Energy Auto, meanwhile, lost over $ 600 million, there was a big show and booths at the Shanghai fair, cars weren’t really built. After all: in 2020, the conglomerate’s profit is said to have amounted to 4.7 billion dollars.

Dangerous for China’s rulers

For days of Evergrande, because an estimated 70,000 to 80,000 people have invested in the construction company, through bonds, stocks and financial products. And now investors fear for their money and millions of people for their future homes: The area of ​​unfinished real estate, calculates “Bloomberg”, corresponds to an area of ​​three quarters of Manhattan.

The real estate market, which is already heated, is seething and boiling, other real estate developers and construction companies are coming under pressure in a sector that accounts for more than a quarter of China’s economic output.

The whole thing is extremely dangerous and delicate for President Xi Jinping. Because on the one hand it is the declared goal of the leadership in Beijing to contain and slow down the often hopelessly overindebted companies, in other words to clean up the market in a completely capitalist manner. At the same time, investors from all over the world have invested in China, according to “Bloomberg” a sum of over 500 billion dollars. And many are starting to withdraw their capital. Beijing cannot afford an escalation, a conflagration, a “Chinese Lehman” – the financial system must remain stable.

Will China Evergrande go bankrupt?

So can the communist leadership, which is always in control, control such necessary purification processes this time too? In western capitalism, since the Lehman crisis, there has been a household word for these delicate situations: “When the music stops”, once CEO of Citigroup. When the music stops playing, the state steps in in the West, governments and central banks, they have to support banks, rescue them, nationalize them and pump money into the system. Unfortunately, we know that well enough and rescues almost inside out.

In China, so far we have been able to observe from afar, the music played on and on, through all the crises – there was always shrill tones, drums and tales, but the party made sure that the music did not stop. And it was not always clear from the West who was conducting what and, above all, who was part of the orchestra.

According to China experts, a middle ground would be possible: Beijing lets Evergrande go bankrupt, but tries to contain the consequences so that no banks get into trouble – and the construction projects can continue. “Credit events,” say analysts at the Swiss bank UBS, “seem inevitable”. So there will be failures.

China’s government has not hesitated before getting into private companies. In 2019, the state took over the Baoshang Bank, a credit institution, for the first time in 20 years, and supported other banks. At the beginning of 2020, Beijing took the conglomerate HNA under its wing, which had lost its way on a shopping tour around the world and was suffering from the corona pandemic. This is why some observers say the Lehman moment is a Western projection, China is different.

Above all is the question: How much pain, cleanup, loss and chaos does the communist leadership allow this time? And which of it is really in your hands? “Where Xi will ultimately draw the line remains a secret,” writes “Bloomberg”.

Beijing’s balancing act

“The difficulties”, judges the “Financial Times”, “come at the worst possible time.” Because stricter regulations for the real estate sector prevent banks from granting new loans to indebted property developers. So China has created its very own possible death spiral. In addition, the country is weakening anyway, growth is suffering from the corona pandemic, from ever new regional lockdowns and the government’s campaign against the overpowering tech companies.

So it is a balancing act: the government wants to contain excesses, to let the air out of a large bubble without endangering prosperity and social stability. It’s hard to predict how it will all turn out. What is certain is that we are witnessing a new blueprint, a crisis and a Chinese-style crisis management system in which the leadership in Beijing is also breaking new ground.