China Evergrande Group, once China’s largest real estate developer, was ordered into liquidation by a Hong Kong judge this week, igniting new concerns about China’s real estate market and its impact on the global economy. Evergrande’s bankruptcy is considered to be China’s “Lehman” moment, akin to the 2008 bankruptcy of Lehman Brothers in the US, which plunged the global banking system into crisis. Who is Evergrande and should investors be concerned?
It is first important to note that the real estate market in China is huge and hugely important to China’s economy. According to CaxiaBank Research, the real estate construction market in China accounted for 24% of the total GDP for the economy, compared with about 16% for the US. Evergrande’s bankruptcy was also huge, with an estimated $300 Billion in debt compared with Lehman’s outstanding debt of about $640 Billion.
Of course, Evergrande is not the only problem in China’s real estate market. Years of excess, fueled by speculation on the part of developers and investors, has fueled excess supply even while China’s population is set to decline. The concern is that Evergrande’s bankruptcy will kick off a domino of falling asset prices, failing developers, and failing banks, just like Lehman.
There is reason to believe that we are seeing the beginnings of a major debt crisis in China. The Shenzhen Real Estate Stock Price Index is down more than 65% since its high in 2018. Similarly, the China MSCI Stock Price index, an indicator of the broader stock market in China, was down 68% since its high in 2021. China has taken steps to bolster the economy, lowering bank reserve requirements to encourage lending, and selling government bonds to fund reconstruction efforts. So far the steps do not appear to be enough to stop the downward spiral.
Nonetheless, the most likely scenario is that this crisis remains largely a China problem. Foreign investors will be watching closely to see if China follows the rule of law, and certainly foreign investors may lose billions. However, the Evergrande bonds are not as widespread nor as highly rated as US mortgage bonds that would threaten the banking system like the Lehman bankruptcy. This may be China’s “Lehman” moment, but it should remain in China.