U.S. Secretary of State Antony Blinken on Oct. 6 urged China to “act responsibly” in handling the debt crisis of real estate developer China Evergrande Group, warning that impact of Beijing’s decisions will resound around the world.
Evergrande, which has more than 1,300 housing projects in some 280 cities, is now the world’s most heavily indebted developer, with more than $300 billion in debt.
Fears of its imminent collapse has triggered a market sell-off and invoked speculation that it would lead to a “Lehman moment”—the idea that the crisis in one large company could send shock waves around the world. When Lehman Brothers filed for bankruptcy in 2008 it had a contagion effect on other major financial institutions, triggering America’s worst economic disaster since the Great Recession and a global market meltdown.
“China has to make sovereign economic decisions for itself, but we also know that what China does economically is going to have profound ramifications, profound effects, on literally the entire world because all of our economies are so intertwined,” Blinken said in an Oct. 6 interview with Bloomberg Television in Paris.
“So certainly when it comes to something that could have a major impact on the Chinese economy we look to China to act responsibly and to deal effectively with any challenges,” he added.
Several more Chinese developers have recently missed payments, prompting fears of broader turmoil in China’s real estate sector. Fantasia Holdings Group, which like Evergrande is based in Shenzhen, on Monday failed to make a total of over $300 million in payments, causing at least two credit rating agencies to assess its status as nearing default.
Yi Gang, director of China’s central bank, the People’s Bank of China, led a meeting last week with top Chinese banking regulators and authorities from the country’s top 24 banks, telling them to focus on stabilizing housing prices and ensure the “stable and healthy development of the real estate market.”
Evergrande, meanwhile, has halted trading in Hong Kong pending a “major transaction.” Chinese state-affiliated media Cailian press said Evergrande’s rival Hopson Development plans to acquire 51 percent of the indebted company’s property services management arm.
The struggles of Evergrande, and that of the real estate sector, typifies the troubles facing the Chinese economy, according to Chinese-American author and economic analyst Cheng Xiaonong.
For decades, the real estate investment has been a main pillar driving China’s economic growth. Real estate and construction sectors combined account for around 29 percent of the country’s GDP in 2016, a level comparable to Spain and Ireland before the 2008 financial crisis, according to a 2020 research paper published on National Bureau of Economic Research.
This real estate binge caused local officials to become ever more dependent on housing construction to meet their economic targets. Local governments have also been heavily borrowing debt to invest in the sector and drive growth, which in part spurred regulators to tighten housing market regulation since 2017, Cheng told NTD, an affiliate of The Epoch Times.
But as much as authorities try to regulate real estate activities to keep the housing bubble from bursting, “it’s simply a mission impossible,” he said.
“Evergrande is the first Chinese property giant to collapse, but it won’t be the last,” he said, adding that following an “eventful autumn, the Chinese economy will see a long winter ahead.”