Evergrande, the Chinese government wants to set an example for the country

by time news

China’s Lehman Brothers could be called Evergrande, the “great white rhino” as the country’s first real estate company is called, now on the brink of financial meltdown. But the gigantic crack was born not only from a deficient policy of the company but also from the new laws imposed by the government in mid-2020. The so-called “red lines” have imposed some parameters that, in the short term, have created instability on the real estate market. One of these parameters is the obligation for builders to have a debt / asset ratio of less than 70%.

With an “exhibition” debt of over 300 billion and with the dictates of the new law, Evergrande was unable to continue to apply for funding.

The government’s move is aimed at calming the real estate market, which has gone mad in cities like Beijing and Shanghai where property prices have doubled within ten years.

The housing market represents 25% of the national GDP. And the investment in the brick is in first place in the preferences of families.

According to Goldman Sachs, 52 trillion dollars is the value of this preference, which has enormous economic but also social implications.

As in all parts of the world, speculation has always been a protagonist in the sector in China, and in fact at least 20% of properties are practically vacant but people continue to invest even if, especially in large cities, the average price of a property it is over 50 times the average annual salary.

In this sea of ​​money, loans and installments, the debt is enormous. In China, corporate debt is 220% of GDP and real estate loans represent 30% of the total.

After years of permissiveness, the Chinese government has thus decided a change of course and the Communist Party wants to stop this too capitalist system.

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The “common prosperity”, desired by the government, tends to reduce inequalities, eliminate monopolistic practices and keep debts under control.

Already in 2020 Evergrande had difficulties. 200,000 direct employees and 3.5 million indirect workers, 1300 projects in almost 300 cities. A huge reality that is now no longer able to pay suppliers with collapsed shares.

But a failure of this magnitude could indeed cause internal and external economic problems and a social tidal wave. This is why the government is trying to avoid a new Lehman but, in any case, it is thought to want to give a clear message to the many overly daring entrepreneurs, that is, that the era of excesses is over.

In any case, the Evergrande theme is absolutely negatively impacting an economy that is struggling to recover after the Coronavirus pandemic. Analysts are convinced that the slumped housing market will give growth a further blow and weigh on investments, spending and confidence.

Perhaps Evergrande will be saved but many sectors, collateral to its activity, will suffer fatal blows.

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