Why China's Economy is Finally Slowing Down

As the overall population remained stable, at least for the time being, the proportion likely to buy a home had begun to shrink. So Evergrande was not only prevented from going into debt, but also began to have difficulty generating money through additional sales of new projects. The two key money-making stages of the cycle simply weren't working like they used to. But they still had debts to pay and apartments to finish, so, cornered, the company began looking for cash. Quite inexplicably, in 2018 it had established an electric vehicle manufacturing division which in turn, perhaps even more inexplicably, included a major aged care division, but in 2021 it courted Xiaomi to see if they would buy a majority stake.

Talks eventually stalled and no sale was made. He also reportedly courted buyers for his stake in the championship-winning soccer club Guangzhou FC, but considering Evergrande was losing hundreds of millions of dollars a year through that ownership, he also failed to sell. It was able to sell its 18% stake in an entertainment joint venture with Tencent for $273 million, but this was ultimately a drop in the bucket compared to what the company needed to right the ship. So ultimately, the death spiral began on Monday, December 6, 2021, not with a bang, not even a whimper, but simply with nothing. That day marked the end of a grace period for already late payments on a set of bonds, but it came and went without payment or even an explanation of when payment might arrive.

Then Tuesday passed with nothing else, and Wednesday and Thursday (with investors still not paying) Fitch Ratings, one of the world's three main credit rating agencies, declared Evergrande in default. This was effectively the official, if largely ceremonial, signal to the financial world that they should not lend money to Evergrande because they might not get it back. As a property developer (a business model focused almost entirely on debt), default is pretty close to the end of the line. Even if the company could obtain loans, they would have such a high interest rate, to offset the risk to the lender, that the effective cost of real estate development would not be competitive relative to the market.

In fact, Evergrande found it easier than the average company in such a dire situation to find lenders, as many believed the company was too big to fail, such an instrumental part of the Chinese

economy

that the CCP would bail it out to avoid an economic crisis. crisis. But that rescue never came. After a year or two of dithering (debt restructuring, shedding assets, cutting costs), in January 2024, a Hong Kong court ruled that it was simply impossible. Evergrande could not be saved, the cycle could not be restarted and the only option was to strip it in parts and leave the creditors as whole as possible.

But the fact of the matter with China is that it is not just an Evergrande issue. While it was the largest and most dramatic example highlighted in the international media, the forces that brought down the giant are putting pressure on almost all Chinese property developers. Country Garden, another giant, appears just a few months behind Evergrande and, after years on life support, is teetering toward liquidation. Dozens of other developers are in default and more than $100 billion in Chinese real estate debt payments have not been paid. There are a number of forces putting pressure on the Chinese

economy

– its demographic shift, its deindustrialisation, its growing insularity – but the way the real estate sector has become so integrally intertwined across the nation means it serves to magnify every one of those problems. .

Basically, the fact that the sector represents a huge portion of its gross domestic product means that it can simultaneously represent a huge drag on gross domestic product. But it also has a tendency to negatively impact the demographics of the people most important to China's economy. Stock market crashes, for example, impact everyone, but they hit hardest those who have a larger portion of their income in the stock market, who tend to be wealthier people and institutions. China's real estate sector, however, is a key source of savings and investment for the country's middle class. This demographic is the most likely to have a large portion of their net worth tied up in a single Evergrande apartment that may now never exist.

The money has simply disappeared and there is a gaping hole in the center of the Chinese economy. The Chinese real estate sector was always going to collapse. Its highly leveraged, debt-driven foundation was never strong enough to sustain itself through anything but the most successful periods of growth. It was fundamentally flawed from the beginning, so some kind of crisis always had to happen. So what is happening in the Chinese economy is essentially a controlled demolition. But this represents a uniquely fragile position for the central government. The Chinese social contract (unsaid, but always understood) is that individuals sacrifice personal freedom in exchange for common economic prosperity.

While dissent, of course, arises because no one can really choose whether to make that concession, a large portion of the population believes unconditionally in this social contract. After all, it is difficult to discuss the means when the end is lifting 800 million out of poverty. But that's history. If Xi Jinping can't hold up his end of the deal, if the common economic property declines, then the question on everyone's mind is why they should have to hold up theirs. Think about how much time you spend in a day waiting: for a meeting to start, for the bus to arrive, or for the laundry to finish.

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