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Evergrande's bankruptcy may be just the beginning of China's real estate crisis

Evergrande's US bankruptcy serves as a cautionary tale about the growth-at-all-costs model that underpinned China's spectacular growth over the past 30 years.
For decades, Evergrande, once one of China's most successful real estate developers, gobbled up debt as China's economy exploded. Demand for housing was so strong, homebuilders often pre-sold apartment units to buyers before construction was complete.
But a sudden shift in policy by China's leaders two years ago has left the country's property developers scrambling for cash, compounding a financial risks within the world's second-largest economy.
Residents pass near the headquarters for Evergrande in Shenzhen in southern China.
Residents pass near the headquarters for Evergrande in Shenzhen in southern China. (AP)
Evergrande has been ordered to knock 39 of these buildings down.
Evergrande has been ordered to knock 39 of these buildings down. (CNN)

What happened to Evergrande?

The story of Evergrande's downfall began in 2021, when the central government moved to curb excessive borrowing to try to slow the rise in home prices, effectively cutting off a major source of funding for property developers.
Evergrande, which had $US300 billion ($470 billion) in liabilities, couldn't shore up cash fast enough to make its debt payments.
It defaulted in December 2021, triggering a market panic. A wave of defaults followed, and China's vast real estate market has yet to recover. Building was suspended on dozens of projects, leaving many "pre-sale" buyers left with no new home and a hefty debt burden.
What happens next as it tries to restructure billions of dollars in offshore debts has massive implications for China's financial system.
Evergrande (pronounced "ever grand," with a silent final "e") filed Thursday for Chapter 15 bankruptcy, which is a way for foreign companies to use US bankruptcy law to restructure debt. The process will take time, as Evergrande has roughly $US19 billion ($30 billion) in offshore debts.
Embattled conglomerate Evergrande rattled global markets in September by warning it could default on its huge debts.
Embattled conglomerate Evergrande rattled global markets in September by warning it could default on its huge debts. (Getty)
The China Evergrande Group logo displayed atop the company's headquarters in Shenzhen, China, on Thursday, Sept. 30, 2021. (Bloomberg via Getty Images)

The next shoe to drop?

Evergrande's liquidity crisis was just the beginning of the pain. Other large builders in China have since defaulted as they struggle to to shore up cash and demand for housing has fallen.
Now, investors around the world are watching nervously as Country Garden, which employs some 300,000 people, missed two payments on its multibillion-dollar debt and said it was considering "various debt management measures."
The cash-strapped developer's debt is now seen as a "very high risk" asset, according to Moody's, which downgraded its rating on Country Garden last week.
Country Garden has until early September to make the payments it missed.
People walk by a map showing Evergrande development projects in China at an Evergrande new housing development in Beijing in September.
People walk by a map showing Evergrande development projects in China at an Evergrande new housing development in Beijing in September. (AP)

China's economy is struggling

It's hard to overstate the importance of the property market China. The industry accounts for as much as 30 per cent of the country's economic activity, and more than two-thirds of household wealth is tied up in real estate.
But nearly three years of "zero Covid" restrictions sapped China's economic growth, and consumers have been reluctant to buy new homes in the face of higher unemployment and falling property values.
After a brief surge in activity earlier this year, China's economic engines have been sputtering. Consumer prices last month fell for the first time in more than two years; youth unemployment has been rising so fast, Chinese authorities simply didn't release the July data.
Retail sales, export demand and factory production are all down.
People walk by a map showing Evergrande development projects in China, at an Evergrande city plaza in Beijing, Wednesday, Sept. 15, 2021. (AP)

Can't Beijing just bail these companies out?

It's unlikely.
While Beijing has made some efforts to help jumpstart demand for housing and free up cash for developers, the days of big, state-funded bailouts for bloated industries appear to be over.
As President Xi Jinping said in a recent speech: "We must maintain historic patience and insist on making steady, step-by-step progress."
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