Taps Coogan – September 20th, 2021

The narrative on Evergrande’s imminent default goes something like this: Evergrande is so indebted, high profile, and systemically dangerous that the Chinese authorities will never let it default and therefore there is no reason to worry.

Indeed, Evergrande is the second largest property developer in China’s economically critical real-estate sector, a sector which grows at roughly twice the overall pace of Chinese GDP and supports roughly a quarter of total Chinese GDP. Evergrande’s floor-space under construction right now is enough to cover three-fourths of Manhattan.

Evergrande has issued billions of dollars of ‘wealth management products,’ a high yielding alternative to bank deposits that are marketed to Chinese savers and frequently compared to a “Ponzi Scheme.” Evergrande’s $305 billion pile of liabilities are held by 128 banks and 121 non-bank institutions across China. They are the largest high-yield debt issuer in China, responsible for 16% of outstanding junk debt.

70% of household wealth in China is in real-estate.

Evergrande is the most systemically dangerous financial intuition in China, and perhaps the world, and it is on the verge of one of the biggest defaults in history.

As people debate whether regulators will bailout Evergrande, and if so when, a more basic question needs answering. Why is this happening now?

China’s workforce-age population peaked back in 2011. It’s overall population has probably also peaked and its dependency ratio is surging. It’s ruled by a communist dictator for life who’s bureaucrats are busy undoing the pro-market reforms of Deng Xiaoping and cracking down on a growing list of industries and political opponents. China’s human rights abuses, lying about Covid, militarism in the South China Sea, and ‘Wolf Warrior’ diplomats have soured its relationship with most of the global economy.

The fact is that observers have been watching the excesses of China’s real-estate development model for over a decade, wondering when the wheels would come off the cart. That moment appears to be now and that is more important than exactly how the Evergrande default ends up being handled.