Evergrande Faces Bankruptcy — 1.5M Could Lose Housing Down Payments
Evergrande, China’s second-largest property developer, is reportedly at risk of bankruptcy. The Chinese authorities have announced to the public the corporation will be unable to pay its interest rates by its next due date. This has left citizens fearful of their future, as it could affect people’s housing conditions.
Evergrande is Running out of Money
The Ministry of Housing and Urban-Rural Development has informed Chinese banks Evergrande will not be paying its interest by September 20, the agreed-upon date. So far, this is the clearest sign the corporation is struggling financially, and could even collapse.
Evergrande owes over $300 billion in debt – a monumental number. Considering the sheer size of the corporation, and the fact it is a huge component of the housing industry, the Chinese authorities have opted to help out via payment restructuring. There is also word they may rescue them entirely from their obligations.
While word of any large corporation potentially falling to its knees is big news, what makes this development so troubling is the type of ripple effect it will have throughout China. For starters, 1.5 million people may lose any down-payments they placed on a property, potentially leaving them homeless.
There are also a significant number of small businesses that have worked for Evergrande but have not been paid for their services. In addition, Evergrande’s workers are reportedly not being paid either. As of 2020, the corporation supposedly employed 123,276 people.
This is not exclusively a financial issue; it also has humanitarian implications. This could impact people’s lives in many ways. Homelessness and unemployment could rise, as well as the collapse of small businesses and there could be a knock-on effect for investment firms. Essentially, this could cause damage to China’s economy and social cohesion.#
Protests have Manifested
This situation has some parallels to the infamous subprime mortgage crisis that happened in the West over a decade ago. If Evergrande’s problems evolve into something similar, this could trigger a recession, just as how the subprime issues did back in 2007.
This is not the only issue China is facing economically. In early August, the country lost $740 billion in stocks due to policy changes around its EdTech industry. This once highly lucrative field has been damaged by China’s Central Committee forbidding foreign investments and preventing educational companies from listing themselves on stock exchanges.
Considering how, just four months ago, China’s economy witnessed its first shrinkage in the last 40 years, Evergrande could be the catalyst for a horrific downward spiral. The country’s citizens appear to be acutely aware of this.
People have begun protesting outside Evergrande’s headquarters, demanding payment. Protesters are made up of ex-employees, contractors awaiting payment, investors, potential homeowners, and even people who have no direct affiliation with Evergrande, but nonetheless, understand the severity of the situation.
If Evergrande collapses in full, the Chinese government is essentially given two options: they can either reimburse every individual who has been affected by printing more money, or they can ignore the struggles of the people. Both options would have implications on the economy.
Examining China’s Options
Reimbursement of lost funds is likely the most ethical response the government could have. It is a generally accepted principle that states owe a duty of care to their citizens, as this is part of a government’s social contract.
In simplistic terms, a social contract is an implicit relationship a governing body has with the society it governs. People act in a responsible manner, and in return, they expect to be protected and taken care of by those in power.
If China does not look after its people, then they are liable to revolt, as the state will have broken its social contract. Considering how citizens have already taken to the streets, it could very quickly erupt into something bigger.
However, printing money to pay people back could do more harm than good. The US Federal Reserve has been trying to do something similar as a means of stimulating the economy during Covid-19, which has triggered a consistent backlash from institutional figures.
In other words, China’s government is stuck in a catch-22 – it can either help its people and possibly damage its economy or leave them to fend for themselves in the hopes of preventing an increase in inflation, as seen in the US and the UK. Expect a response from the Chinese authorities within the coming weeks.
What do you think China should do to try and rectify the situation? Let us know in the comments below.