Evergrande: A Disaster in Making for Chinese Economy! - An Essay

China’s second largest Agglomerate in the field of real estate Evergrande, over the years increased its debt to 300 bn. Dollar in the garb of extending its operations, venturing into the field of electric vehicle manufacturing thereby transgressing all the three redlines imposed by Xi Ping government on debt to be held by companies. Although majority of the borrowing is from one to one within the country, but international bonds are also held by some foreign entities. With this giant not in a position to meet the payment liabilities due since September, 2021, having been caught in a severe cash crunch, has barely managed to repay some dues within the country by disposing the assets at discounted rates and deferring payments to suppliers and by issuing paper bonds. The company has also failed to meet the international obligations in case of international bonds and may seek more time from them, the contagion will spread to some Central banks of countries across the globe but it is not expected to be so serious as in the Lehman Brothers case of 2008. However, due to non-payment of the dues within the country to the creditors and suppliers as well as to the customers who had deposited amount of advance with the company for booking the flats and bungalows in various provinces will cause considerable financial distress within the country, adversely affecting the demand as a whole in the economy. As the Central Government is not willing to bail out the company some of the provincial governments will try to protect the rights of some suppliers and customers to a small extent by disposing off the assets at highly discounted rates; but the proposed modalities of the process are still not clear. The aim is to reduce the impending damage to the targeted rate of growth of the economy, which is very considerably has hither to been achieved by resorting to such actions by big companies which constitute ‘moral hazard’, as now all creditors and suppliers are expected to act rationally. In this direction, therefore, all the court cases relating to the crisis are transferred to the provinces. However, another problem is the half-finished apartments which constitute a major part of the company’s inventory; even for the completed apartments, the demand has dwindled. In China, real estate investment is a major part of average Chinese family expenditure from life-time earnings. With so much of money clogged, the average purchasing power of the citizens will come down drastically, affecting the rate of GDP growth. As the moral hazard growth rate of China has also dried up considerably, the Chinese economy will suffer a steep downward trend, unless they develop other forms of subsidiary growth rate involving moral hazard of some other kind. Looking to these conditions, the latest World Economic Outlook has revised the growth rate projection for China to 8.1% for 2021 and 4.8% for 2022, whereas for India it is 9.0% and 9.0% respectively (Source: IMF, The latest World Economic Outlook, January, 2022).