The management crisis at Chinese real estate giant Evergrande Group has caused a stir in global markets. The Chinese government needs to take appropriate measures to prevent the crisis from triggering a negative chain reaction.
Founded in 1996, Evergrande has grown rapidly by developing condominiums and selling them on a large scale while incurring huge debts. In addition, it has expanded into such businesses as mineral water and electric vehicles, and is also the parent company of a soccer club.
However, the company’s business performance has deteriorated with excessive debts placing a heavy burden on its management. As the business expansion policy has stalled, the company is having a severe cash flow problem.
The company’s total debts reportedly amount to about ¥33 trillion. If the company goes bankrupt, the impact on the Chinese economy would be enormous.
There is a risk that contractors that have undertaken the construction of condominium buildings will not be able to collect the money owed to them, leading to a chain of bankruptcies. The delivery of sold real estate properties is also expected to be delayed.
A large number of investors have reportedly been protesting at Evergrande’s headquarters in Shenzhen, Guangdong Province, which could lead to social unrest.
Economies worldwide, including Japan’s, would inevitably be hit hard if the world’s second-largest economy was shaken.
Evergrande’s management crisis has sparked turmoil in the global stock market. On Sept. 20, stock prices dropped sharply in the United States and Europe, as well as the Hong Kong market where Evergrande is listed. On the Tokyo Stock Exchange, the Nikkei Stock Average also fell below 30,000 for the first time in two weeks.
Global stock prices have been at high levels, backed by excessive injections of money due to monetary easing. The risk of a sharp decline in stock prices due to some kind of a shock is growing.
It is said that Evergrande’s corporate bond interest payments are approaching the end of their terms. There are concerns that something unusual could occur again in the market if the company defaults. Financial authorities in each country need to strengthen their vigilance.
The Chinese government has been letting Evergrande’s unbridled business expansion continue under its reform and opening-up policy. However, when the surge in real estate prices became a social problem, the government changed its policy and has taken such actions as restricting the total amount of real estate loans by financial institutions.
The Chinese government should act cautiously and calmly to prevent the crisis from spreading through a sudden implementation of tightening measures.
Chinese President Xi Jinping has touted his slogan of “common prosperity,” which aims to narrow the gap between the rich and the poor. Some say that Beijing has given priority to controlling real estate prices, but is reluctant to bail out Evergrande. How the Chinese government plans to deal with the situation remains unclear.
The Xi administration should be aware that such policy uncertainty has been causing market anxiety.
— The original Japanese article appeared in The Yomiuri Shimbun on Sept. 24, 2021.