tl;dr
China’s real estate sector is teetering on the edge of a crisis, with the collapse of Evergrande serving as a stark warning of what’s to come. Once the nation’s largest property developer, Evergrande now owes hundreds of billions of dollars in debt and was recently delisted from Hong Kong’s stock ma...
China’s real estate sector is teetering on the edge of a crisis, with the collapse of Evergrande serving as a stark warning of what’s to come. Once the nation’s largest property developer, Evergrande now owes hundreds of billions of dollars in debt and was recently delisted from Hong Kong’s stock market—a move that has sent shockwaves through the industry. Brian McCarthy, managing principal at Macrolens, warns that this is just the beginning. “All the ‘large names’ in China’s property development sector are going to become zombies basically,” he says, unless authorities take drastic steps to liquidate troubled developers’ assets and settle their debts.
The term “zombie companies” refers to businesses that are technically alive but unable to generate enough revenue to cover their costs. In this case, McCarthy argues that without a painful restructuring—selling assets, writing down debts, and accepting partial repayment—China’s real estate giants will continue to drag down the economy. “The system will have to carry the bad debts,” he explains, a pattern that has defined China’s economic story for decades. This, he adds, is why the country is mired in a debt deflation spiral: debts remain unresolved, stifling growth and investment.
The situation isn’t just about real estate. McCarthy points to the government’s recent “anti-involution” campaign, an effort to curb excessive competition and overcapacity in industries like manufacturing and tech. “It’s going to be the same story,” he says. “If you don’t write down the debt, you’re not addressing the problem.”
But not everyone agrees on how the crisis will unfold. Luke Gromen, a macroeconomic analyst, takes a different view. He argues that China’s state-controlled financial system gives it a unique ability to absorb defaults. “The government prints the money to pay off the debt,” he says, noting that this has led to a weakening yuan. However, he adds, capital controls—strict rules limiting the movement of money in and out of the country—should prevent a major exodus of yuan, which could otherwise trigger a currency crisis.
So, where does this leave China? The real estate sector’s collapse could ripple through the economy, from construction workers losing jobs to homeowners facing defaulted mortgages. Meanwhile, the government’s options are limited: either let the system absorb the pain through debt write-downs, risking a deeper economic slowdown, or try to bail out developers with more stimulus, which could fuel inflation and further weaken the yuan.
As the dust settles on Evergrande’s fall, one question lingers: Will China’s leaders choose the harder path of restructuring and accepting losses, or will they double down on stimulus, hoping to delay the inevitable? What do you think?