Last week, Evergrande, the largest Chinese property group with 1300 ongoing projects in 280 Chinese cities, filed for bankruptcy protection in New York, using the so-called Chapter 15 process for foreign companies seeking recognition of their restructuring in the US. According to the petition, Evergrande is also pursuing parallel “schemes of arrangement” and restructuring, in the Cayman Islands, Hong Kong and in British Virgin Islands. This follows losses nearing 600bn yuan, i.e. around USD 80bn over the last two years, after having accumulated debt of around USD 330bn.
Evergrande has been in trouble for years. In December 2021, it defaulted on its offshore debt, causing a liquidity crisis across China’s real estate sector. That incident dragged down home prices, and that put further pressure on struggling developers, putting them at risk of default. Over the last couple of years, many of these developers have gone bankrupt. One of the groups that has been put at risk is Country Garden, the largest private-sector property development group. Country Garden said it may lose around USD 8bn in the next six months.
The difficulties of the real-estate sector have forced the People’s Bank of China (PBOC), the Chinese central bank, to cut interest rates for the second time in three months. Last week, the PBOC lowered the rate on 401 billion yuan (USD 55.25 billion) worth of one-year medium-term lending facility loans to some financial institutions to 2.50%, from 2.65% previously. This could be the precursor to a cut of the 5-year loan prime rate, the rate on medium-term loans that is particularly relevant for real estate institutions, which most analysts are expecting this week. The central bank also injected 204 billion yuan through seven-day reverse repos, while cutting borrowing costs to 1.80%, from 1.90% previously.
China’s real-estate troubles are reverberating through its economy, putting at serious risk the 5% GDP growth objective set by the CPP at the October 2022 congress, which was believed to be an “easy target” for the new premier Li Qiang for his first year on the job. A weakening of the Chinese economy would have impact on growth both in Asia and on the global economy. In Europe, for example, two export powerhouses, Germany and the Netherlands, have already experienced two consecutive quarters of negative growth, entering a technical recession.
Throughout all this, only the US economy seems to still be enjoying a robust performance, with a 2.4% annualised rate of growth in Q2 2023, faster than the 2.0% recorded in Q1. US growth is being fuelled by consumer spending and resilient investment. While a deceleration is expected in the second half of the year, the US economy, in the absence of further shocks, may still experience the sort of “soft landing” that the US Federal Reserve has been pursuing for the last year and a half, during which time policy rates have been increased by over 5%. A shock from China may put at risk the performance not just of the US, but of the entire global economy.
