We live in a globally connected society. If something happens on one side of the world, there will be an impact felt on the other. Our financial systems rely upon each other, and just about every major nation is hugely reliant on foreign investments and money from across the globe. That is why many in the United States are panicking right now about a situation occurring thousands of miles away in a country that is traditionally considered a major rival of the United States.
You may have heard something about the Evergrande crisis in China on the news, but to refresh your memory, we’ll give a quick breakdown of what’s going on before diving into the impact it has on the U.S market.
Evergrande is China’s second-biggest property developer in terms of sales. They are a massive business, with branches specializing in health care, consumer products, vehicle production, and film and television. Their real estate property service branch is a huge player in the Chinese industry, with over 1,300 real estate projects spread across 280 Chinese cities. They play a significant role in the Chinese economy, with over 200,000 employees and 3.8 million jobs created indirectly.
Evergrande expanded rapidly and would purchase a considerable amount of assets on debt. However, liquidity has been a significant problem for them, and now they find themselves over $300 billion in debt, without any obvious pathways towards repayment. This means they are on the brink of defaulting on their debt, with billions of dollars worth of payment due in the next year.
If Evergrande collapses under the weight of its massive debts, it will deal a major blow to the Chinese economy, massively impacting home buyers, banks, and jobseekers. Evergrande has even taken to pressuring their employees to lend money, framing it as a high-interest investment opportunity. Their stock price has fallen 80% throughout 2021.
One of the hopes for preventing the imminent collapse of Evergrande is a government bailout. Evergrande is hugely important to the Chinese economy, and the Chinese government may step in to prevent a domino effect from occurring from this situation. Evergrande owes money to a large number of domestic banks, so if Evergrande defaults, there could be a ripple effect in the Chinese banking system that translates to an economic disaster for the nation.
However, most sources indicate that there won’t be a bailout unless the worst-case scenario occurs. While the situation is obviously drastic in China, let’s look at the impact of Evergrande’s potential collapse domestically.
Expert opinion on how Evergrande is going to impact the market in the United States is divided. The immediate impact of the crisis was that the Dow suffered. 614 points were knocked off the Dow in the wake of the news of the potential collapse of Evergrande. U.S investors responded to the tight debt deadline by pulling away from real estate investments, which significantly dropped the market.
However, other experts aren’t so sure that Evergrande’s impact will be anything more than a regional issue, despite the global nature of our financial system. The fear has been with experts that Evergrande could spell another Lehman Brothers situation. The collapse of Lehman Brothers in 2008 spelled the beginning of the global financial crisis, which had a far-reaching impact on just about every nation on the planet. But while it has become popular to compare the two, most experts don’t believe Evergrande will have anywhere near the global impact of Lehman Brothers.
According to a MarketWatch interview, experts are saying the impact of Evergrande will be felt primarily in the Chinese real estate market rather than anywhere else. “Right now, I think this is a bigger concern for China, rather than the U.S. economy,” said Rubeela Farooqi, chief U.S. economist of High Frequency Economics. In the same interview, another expert put down concerns of a Lehman Brother-style domino effect. “Is this another Lehman moment for the U.S.? I’d say no,” said Jay Byron, chief economist at Wells Fargo Corporate & Investment Bank.
What experts do say is a risk isn’t the U.S real estate market being impacted by Evergrande. It is a potential decline in exports from China as a result of an economic crisis. However, this type of thinking is based on a lot of hypotheticals.
Overall, the U.S real estate market won’t likely be impacted in a significant way due to Evergrande. What it does do is increase volatility in the global financial system, which is why some investors have panicked. Overall, Evergrande should serve as a warning to U.S real estate property service firms on the risk of accruing significant debt without liquidity.
