Borrowing binge has left China in a debt black hole 

Embattled Evergrande Chairman Hui Ka Yan’s precarious position highlights the country’s economic risks

Rags to riches to police surveillance. Embattled Evergrande Chairman Hui Ka Yan is now being investigated for allegedly “moving assets offshore” after the property giant hurtled towards oblivion.

Media reports emerged today of the depth and breadth of the crisis inside the Evergrande Group, which is buried under a US$300 billion debt mountain.

The fallout is already threatening to wreck China’s economy and shatter the Communist Party’s credentials as the caretaker of competency. As for Hui, the stakes are higher than the tower blocks the company he founded built. 

“The 64-year-old chairman, a longtime Party member, was born in poverty to the son of a wood carver, before rising to become Asia’s second-richest person, with a net worth of $42 billion in 2017,” Dexter Roberts, the author of The Myth of Chinese Capitalism, posted in his Trade War newsletter at the weekend.

“Today [his] fortune has dropped to $1.8 billion, according to the Bloomberg Billionaires Index. On October 30 a hearing will be held in [a] Hong Kong court that could force Evergrande into liquidation, reports Bloomberg News,” Roberts added after Hui was placed under police surveillance.

Why it matters:

  • Up to 90% of household wealth in China is tied up in property.
  • The real estate sector makes up around 30% of the world’s second-largest economy’s gross domestic product or GDP.
  • Another Chinese property developer Country Garden is also facing default
  • At least four million residential homes are now unoccupied nationwide.

China miracle of perpetual growth led to misplaced confidence.

Foreign Policy’s China Brief

Delve deeper: But this is not just a matter of Hui’s precarious position or the bursting of China’s property bubble. It runs much deeper and could plunge the country into a recession.

Between the lines: “The scale of China’s property problems – enormous levels of debt, an oversupply of apartments and consumers’ increasing wariness of buying – means the government could be forced in the coming years to spend huge sums of money bailing out banks,” The New York Times reported today.

The bottom line: “That’s because China’s giant banking system, the world’s largest, is heavily exposed to the real estate crisis: Nearly 40% of all bank loans in the country are related to property,” the NYT revealed.

Big picture: “For years, many economists’ belief in the so-called China miracle of perpetual growth led to misplaced confidence in the political leadership. That confidence has now faded,” Foreign Policy’s China Brief reported in August.

China Factor comment: Chairman Hui’s game plan of building a massive construction conglomerate off the back of rampant borrowing echoes the broader economy. Local government debt hovered around $13 trillion last year, or 76% of economic output.