Evergrande, the Chinese real estate giant threatening the world economy
The Chinese real estate giant Evergrande is one of the largest companies in China. It currently has an immense debt, estimated at 300 billion dollars (equivalent to the GDP of countries like South Africa).
On September 23, the company has to begin pay that debt. If Evergrande cannot pay, it will go bankrupt. Considering the size of the company, this could have consequences for the economy of the entire planet.
Some economists believe that Evergrande's crash may be comparable to the Lehman Brothers' bankruptcy, which sparked the beginning of the Great Recession in 2008. In fact, Asian stock markets have already seen serious losses.
The aforementioned $ 300 billion from Evergrande is the equivalent of 2% of the Chinese economy. The impact of the company's bankruptcy on the biggest economy in Asia could cause a global domino effect.
Also, if Evergrande falls, there will be a tightening of the Chinese economy. Real estate activity has grown to the point of representing 29% of GDP, which according to analysts may be based on an unaffordable bubble. If that is the case, China finds itself in a situation similar to that of the U.S. when the Lehman Brothers went bankrupt.
Financial media claim that Evergrande currently has a hold on its large projects because it lacks the cash to pay for the works in progress.
Evergrande is a giant company with astronomical figures. Look at their number of employees: around 200,000.
Image: Loegunn Lai / Unsplash
Some economists encourage calm and claim that nothing will happen because the world economy can withstand the fall of Evergrande. Others, however, point at the golden rule of economics, that money will be withdrawn at the slightest possibility of danger. This behavioural pattern affects stock market activity.
Beyond construction, Evergrande has expanded into the sector of electric cars, bottled water, food and sports. It has a soccer team - Guangzhou Evergrande - and an agreement with Real Madrid.
Image: Cheng Kamyin / Unsplash
Some analysts say that there is a political component in the fall of Evergrande. According to them, Chinese President Xi Jinping wants to make it clear that the country is still a state-controlled economy. He could be manoeuvring in certain ways to make that message clear to China's large companies. In the case of Evergrande, we may be facing a “controlled demolition” by the Chinese government.
Some experts see a certain authoritarian drift in Xi Jinping's policies. He may even be returning to certain aspects of communism. That would include limiting the autonomy of big Chinese companies and the power of the country's big businessmen.
Economists are concerned that, if the terms of Evergrande's debt expire and the company cannot pay, there will be a catastrophic bankruptcy and a contagion effect on the economies of the entire planet.
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All this because Evergrande, in order to grow, built on an easy credit fever in the national and world economy. Such a fever usually arises when the economy accelerates and no government puts the brakes.
Image: Mufid Majnun / Unsplash
This economic threat may strongly affect the geopolitical moment that China is experiencing, immersed in a new cold war that puts it face to face with the United States.
Image: Li Yang / Unsplash
Is Chinese economic growth slowing down? It's a possibility. They have been many years of growing, growing and growing. At some point the growth will inevitably diminish.
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The Chinese government is expected to cushion Evergrande's fall, as it is "too big to fail." However, hardly any analyst is betting on a bailout that will save the giant from its debts. At most, the bankruptcy will be organized and the projects in progress redistributed.
Many are the analysts who assure that there is no serious danger for the western economies. But of course, there were also plenty of economists in 2008 assuring that subprime mortgages were not going to cause any problems for the world economy. And then came the Great Recession.
Image: Tonik / Unsplash
All in all, the economic world holds its breath while watching what happens with Evergrande in China. This month is key for the future of this giant and, perhaps, for the world economy.