Preventing an Evergrande Confidence Crisis in China
A looming default by the Chinese property developer Evergrande has sent shock waves through global capital markets. The Chinese government and central bank have the means to prevent a full-blown financial crisis, but they need to communicate their strategy now in order to calm jittery investors.
NEW YORK – Many have attributed the recent decline in major global stock market indices to concerns about the heavily indebted Chinese property development group Evergrande. To restore investor confidence and minimize economic damage, the Chinese authorities must eliminate any doubt that they will do what is necessary to contain potential spillovers from an Evergrande default.
Evergrande specializes in building and selling residential apartments in second- and third-tier Chinese cities, although it also dabbles in other businesses, including manufacturing electric vehicles. The firm’s total liabilities are estimated to be about CN¥2 trillion (roughly $300 billion), which is equivalent to approximately 2% of China’s GDP in 2020.
On one level, the actual financial problem is substantially smaller than this number suggests. Evergrande owns many tangible assets, including land (technically, the right to build on it), completed apartments that have not yet been sold, and partly constructed apartment buildings. According to the company, the value of its assets exceeds that of its liabilities.