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How the liquidation of one of China's largest companies threatens its entire economy

ARI SHAPIRO, HOST:

What impact will the implosion of China's largest real estate developer have on the global economy? Evergrande built a property empire in hundreds of cities through massive amounts of borrowing. It's now about $300 billion in debt, and this week a court in Hong Kong ordered its liquidation. Dexter Tiff Roberts is a senior fellow at the Atlantic Council's Global China Hub. Thanks for joining us.

DEXTER TIFF ROBERTS: Oh, great to be on.

SHAPIRO: Evergrande has been slowly imploding for a few years now. How did it go from being the biggest company in one of China's biggest industries to now being liquidated?

ROBERTS: Well, you know, if you - it really began all the way back in 2020. So the Chinese government announced something they called the three red lines, which was a policy that aimed to encourage and do some arm-twisting to get some of the bigger property developers, including Evergrande, to start to shed some of their debt. To a degree, they've been a victim of their own success. We've seen now for three years a slump in the property market, which has hit the economy very hard. And now we're seeing this spectacular, I guess, slow-motion implosion of Evergrande - brings us to yesterday with the announcement by the Hong Kong court ordering it into liquidation.

SHAPIRO: And there have been fears that Evergrande's collapse could set off a chain reaction of defaults. I mean, a couple years ago, our colleague Emily Feng spoke with a contractor in China named Sheng Weixin who had not been paid for his work building apartments for Evergrande.

SHENG WEIXIN: (Through interpreter) The last two days have been filled with endless fights with the police and with desperate homebuyers. Evergrande has no money to pay us back, so we're also fighting with renovators and other contractors.

SHAPIRO: So tell us about the potential ripple effects of this.

ROBERTS: Yeah, well, at the height of the property sector, it made up something close to a quarter of the entire GDP.

SHAPIRO: That is wild.

ROBERTS: Now it's been brought down a bit with the downturn in the economy, but this gives you a sense of how much of the economy is actually involved. We have the developers, obviously, like Evergrande, but we also have builders. We have the renovators. We have the white goods companies that are selling products that go into these apartments. And so if a big property developer like Evergrande starts to not be able to make its payments, that has a ripple effect that goes right down through the entire economy.

SHAPIRO: I've read that this is not like the implosion of Lehman Brothers, which was one of the early events in the global financial collapse. But can you explain why this doesn't raise those kinds of fears? - 'cause it certainly sounds scary.

ROBERTS: Well, I mean, first of all, as I mentioned a moment ago, the process of this massive downturn in the property sector - and now we're seeing the potential liquidation of Evergrande - initially was prompted by a policy decision by the Chinese government. They wanted to deleverage, and so they started to force property developers like Evergrande to stop borrowing so much. And the other thing about Lehman - you know, it was obviously operating in the U.S. economy, the U.S. financial system being very much tied into the global financial system as well. China is very, very different. I believe the total of the 300 billion or so in debts that Evergrande now holds - only a few billion are actually held by overseas creditors. So this is going to have a very different effect. It will not have as direct an effect as Lehman did, by any means, on the global economy. Rather, what it will do is really start to put further pressure on an already-ailing Chinese economy. And that ultimately becomes very bad news for the U.S. and the rest of the world.

SHAPIRO: Real estate is such a big part of the Chinese economy. What could this mean for China economically?

ROBERTS: For China, it's a very, very big deal. As I mentioned earlier, up to a quarter of the entire economy has been driven by the property sector. In terms of the average Chinese, you have a situation where something like 80% of household assets are held in the apartments that people own. So one very negative impact we've seen on the Chinese consumer is the fact that they've seen, you know, this - basically a negative wealth effect. They've seen the depreciation of their most important asset, the apartment that they live in. And this has had a knock-on effect on consumer confidence. We've seen multiple quarters now of very low confidence by the Chinese consumer. You add this to the fact that the property market is doing so badly, and it's just even more strain across the Chinese economy.

SHAPIRO: Dexter Tiff Roberts is Atlantic Council senior fellow and director of China affairs at the University of Montana. Thanks a lot.

ROBERTS: Thank you.

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Megan Lim
[Copyright 2024 NPR]
Ari Shapiro has been one of the hosts of All Things Considered, NPR's award-winning afternoon newsmagazine, since 2015. During his first two years on the program, listenership to All Things Considered grew at an unprecedented rate, with more people tuning in during a typical quarter-hour than any other program on the radio.