Share this @internewscast.com
As U.S. President Biden recently returned from his trip to Asia there was one country that he did not visit which has significant global economic implications; China. The Great Recession and the Asian Financial Crisis still lives fresh in many peoples’ minds and a possible global recession looms given geopolitical tensions, lockdowns in China due to a global pandemic, coupled with China’s Evergrande Group possibly defaulting on its debt. This month, Evergrande’s onshore unit won bondholder approval to extend payments originally due May 6th by six months on two yuan notes, according to filings to the Shanghai Stock Exchange. The conglomerate will unveil a debt restructuring proposal for its creditors by the end of July, but the reputational damage has already been done.
One can’t help but ask “Is this another Lehman Brothers Moment?” While Evergrande, Shimao, and the other real estate developers’ defaults could lead to an economic downturn and the loss of over 250 million Chinese jobs there is still one thing that can stop it, the Chinese government. The Chinese Communist Party (CCP) has been adept creating a well-planned response, and unifying the people behind a common cause.
In 2008, Lehman Brothers Holdings Inc. officially filed for bankruptcy. Led by risky investments, wild speculation, and a belief that the real estate market couldn’t decline. This singular event catalyzed the Great Recession that was responsible for an estimated $10 Trillion in lost economic output. The global economy eventually recovered but many people’s houses and retirement savings were gone forever. Since December 6th, 2021, the China Evergrande Group has been in technical default. Many fear that this could lead to the collapse of the Chinese Real estate market and wipe out billions in generational wealth. These similarities have led people to label this as China’s Lehman Brothers collapse, but is it really?
America’s real estate crash and economic response can provide important lessons to China. Its response eventually led to economic recovery and has been analyzed extensively for the last decade. A possible program that may hold significant interest is the Troubled Asset Release Program (TAR
The Chinese government has provided mixed messages in helping Evergrande. Beijing has been reluctant to unequivocally give their support for fear of public backlash from individuals who might also want a bailout. However, at other times, the CCP have stepped in and taken increased control over the Evergrande Group, something they could also do with other developers for fear of public unrest over the housing crises. China saw protests, a rare occurrence in China, outside of the Evergrande Group’s headquarters in Shenzhen highlighting the peoples’ outrage at this situation, and current lockdowns in China have only fueled this anger. In China, homes can easily represent 45% of a household net worth. In some tier three and tier four cities, it is more like 70%, compared with just 27% in the U.S.
Where potential defaults could continue is in the $20 billion in foreign bonds. After a group of international investors threatened to move forward with legal action that could include liquidation of company assets, several banks moved to seize $2 billion from one of Evergrande’s key subsidiaries on March 22. This could worsen the situation even further, Evergrande has previously responded that they “sincerely ask all offshore creditors to give us more time.” Debts and deliverables to Chinese investors have been prioritized, and offshore investors will either need to wait or possibly write off losses as bad debt.
Real estate accounts for about 25% of China’s GDP and has been a key driver of growth. Beijing needs to strike the right balance in supporting Evergrande while at the same time not enabling a moral hazard in which the government bails out any company that defaults on its debt. The lessons learned from the US Financial Crisis will show what works and what perpetuates a corrupt system. While prioritizing the delivery of investments made, the CCP must support corporations through assisting with restructuring debt and promoting better governance and reporting mechanisms. With a focus on the common Chinese investors and in line with President Xi’s “Common Prosperity” theme, Beijing must develop an environment which promotes more trust, transparency, and engenders fiscal responsibility.
Earl Carr is Founder and Chief Executive Officer at CJPA Global Advisors and editor of the new book “From Trump to Biden and Beyond: Reimagining US-China Relations” Mr. Carr is also an Adjunct Instructor at NYU’s Center for Global Affairs.
Special thanks to James Hinote Geopolitical Analyst at CGPA Global Advisors for his exceptional research and editorial skills as well as to Pengyu Lu, Senior Advisor at CJPA Global Advisor for providing a timeline of events.