Zombification of China Property Crisis: A Case Study of Evergrande’s Bankruptcy

• 22 August 2023
• International News
• 2083 Views

Amidst the labyrinthine landscape of China’s property market, a distressing trend is emerging, encapsulated by the term ‘zombification’. This phenomenon, characterized by stalled construction projects due to insurmountable financial constraints, is casting a pall over the industry. A closer examination reveals the intricate web of challenges facing property developers, with the predicament rippling out to hamper consumer sentiment and trigger a sluggish housing market, according to a Nikkei Asia press release on 18 August 2023.

The demographic shift in China’s population, coupled with economic complexities, has cast a shadow of uncertainty over the property sector’s prospects. The adverse impact of this paradigm shift is palpable, as evident from the financial turmoil encountered by major property players, notably Evergrande Group. Formerly a behemoth in the field, Evergrande now finds itself entangled in 1,519 lawsuits demanding 395 billion yuan, predominantly for unpaid construction and material costs. The poignant predicament is further highlighted by the inability to fulfill housing commitments due to liquidity crunches stymying construction endeavors.

The stark financial fallout for Evergrande becomes glaringly apparent, with accumulated losses totaling 580 billion yuan (US$80 billion) across 2021 and 2022. This staggering figure has precipitated a debt quagmire, with the company’s liabilities soaring to a towering 2,437 billion yuan (US$334.68 billion) by the close of 2022.

In a bid to mitigate the crisis, Evergrande has sought refuge under Chapter 15 of the U.S. bankruptcy code, a measure with limited efficacy. This tactical move, while navigating some complexities, fails to provide a comprehensive solution, especially considering that a substantial portion (27.3%) of its 612 billion yuan in interest-bearing debt is denominated in U.S. currency. The larger part (69.7%) of the liabilities remains grounded within China’s borders.

Yet, Evergrande’s plight is not an isolated occurrence. A cascade of similar scenarios afflicts other prominent property developers. Country Garden Holdings, a key player, anticipates a potential net loss ranging from 45 billion to 55 billion yuan for H1 2023. The saga echoes across the sector, as financially beleaguered companies abandon construction projects prematurely, underscoring the limitations of a growth model hinging on escalating real estate valuations.

What is Beijing’s stance on the issue?

Amidst this labyrinth of challenges, Beijing’s response becomes a crucial focal point. The People’s Bank of China’s recent quarterly policy report conveys the imperative of risk mitigation and elimination. The acknowledgment of the financial quagmire gripping several companies is explicit. Yet, Beijing treads cautiously, refraining from radical interventions that could potentially trigger unrest. This measured stance is propelled by concerns of upheaval, considering the far-reaching ramifications on business partners and wider societal repercussions.

The departure of Guo Shuqing, the Chinese Communist Party secretary for the People’s Bank of China, underscores the intricacies at play. Guo, a proponent of financial reforms, championed the “three red lines” approach to curtail fundraising by property developers. However, Beijing’s overarching commitment to economic stability, as underlined by President Xi Jinping’s government, tempers the impulse for sweeping structural transformations.

As China’s property sector navigates uncharted waters, the echoes of Evergrande’s debt debacle resonate as a harbinger of complex challenges. The evolving dynamics, intricately interwoven with economic, social, and political factors, demand a balanced approach to safeguarding stability while fostering sustainable growth.

• Analysis
• Economy and Finance