Evergrande, The "Chinese Lehman Brothers"?

Evergrande, China's largest property developer, directly employs 200,000 people and indirectly employs 3.8 million people. Problem: the group is bankrupt and announced on September 14 that it is facing a risk of default. Evergrande is crushed by liabilities of nearly 260 billion euros, while it has yet to complete 1.4 million homes with a total value of 170 billion euros. The many homeowners who have paid for the construction of their homes in advance may never see the color of it. On Monday, September 13th, angry investors demonstrated outside the group's headquarters in Shenzhen. The shareholders are also in a bad mood, as the shares of the Chinese real estate giant have lost more than 75% of their value.

Person Holding Blue and Clear Ballpoint Pen

Image Source: Pexels

Beyond the devastated owners and the cheated shareholders, are there any repercussions at the national level and in terms of international finance? Some speak of the "Chinese Lehman Brothers", but what is it really? In recent years, the group has benefited from the credit bubble encouraged by the government: to finance its accelerated growth and to recover from the 2008 crisis, the Chinese government did not use the money printing weapon, as the United States and the euro zone did, but rather the weapon of forced credit, with banks having to provide loans to companies to support activity. This credit-led growth was met with a depression caused by COVID. On the other hand, in order to combat speculation, Xi Jinping's regime has made a 180-degree turn by tightening the conditions for access to credit. Evergrande has been hit hard by this change in economic policy.

The Evergrande developer is not an isolated case. Corporate debt in China has become gigantic and exceeds 160% of GDP, a world record. The collapse of the developer could have a domino effect in China, affecting not only real estate but also the banking sector. In addition, Evergrande bonds are spread across Chinese and foreign funds. European or American investors could be impacted.

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