China’s Evergrande has recently been ordered to liquidate by a Hong Kong court. Creditors could not agree on how to restructure the debts of the former property behemoth. Evergrande has teetered on the brink of collapse for about two years, after a massive 2021 default left the firm unable to service its debts – over $300 billion in liabilities.
The recent news regarding Evergrande, however, is simply another point on a continuing timeline that details the boom and bust of China’s debt-fueled property bubble. For years, companies such as Evergrande used “easy money” to finance massive construction initiatives. This property boom has been credited for driving up to nearly 25% of China’s yearly economic output. That bubble is now slowly imploding. As the graph below shows, investment in real-estate fell by nearly 10% in 2023. Housing sales and construction have also slipped.
There have been spillover effects. China’s economy grew at a record-low rate of about 5.2% last year. Local governments have been deprived of revenue streams from land sales. Consumer spending and sentiment is weak.
Given China’s position as the world’s second largest economy, the United States should be cognizant of its deep-seated, structural ailments. While U.S. consumers are likely to be insulated, investors with exposure to China should remain wary. U.S. producers should eye potential Chinese export deflation as Beijing attempts to boost manufacturing to counter its real-estate slowdown.
Source: Jason Douglas and Stella Yifan Xie, WSJ; Scott Neuman, NPR
Reade Ben is a policy analyst at the Manhattan Institute.
Interested in real economic insights? Want to stay ahead of the competition? Sign up for our weekly newsletter here.
Photo by GOCMEN/iStock