Last week, global markets shook after a Chinese company named Evergrande fell into what looks like a downward spiral into oblivion. Evergrande is — or was — the second-largest real estate company in China. A couple years ago, it was the world’s most valuable real estate stock. It’s also been involved in an eclectic mix of other businesses, from mineral water to electric cars to pig farming. It even owns a professional soccer team. But recently it’s been having a really hard time repaying a mammoth amount of debt, a whopping $300 billion worth.
The Evergrande story is bigger than just one company. It’s about China’s unsustainable model of economic growth, which has relied on endless investment and a mad, debt-fueled development frenzy in recent years. That model helped China soar, but the country is now experiencing some turbulence. Last week, some alarmist observers were calling this China’s “Lehman moment” — a reference to the collapse of Lehman Brothers that preceded the 2008 financial crisis — but China-focused economistsargue that’s overblown.
Nonetheless, given how interconnected the global economy is, investors remain worried about the future of the Chinese economy. It’s been a nuclear reactor powering the globe’s economic growth. Troubles there could have ripple effects around the world.
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We decided to put together a little listicle about what we’ve learned from the Evergrande story so far.
1) Real estate has been a huge part of China’s economic growth
This aerial photo taken on September 17, 2021 shows the halted under-construction Evergrande Cultural Tourism City, a mixed-used residential-retail-entertainment development, in Taicang, Suzhou city, in China’s eastern Jiangsu province. (Photo by Vivian LIN / AFP) (Photo by VIVIAN LIN/AFP via Getty Images)
VIVIAN LIN/AFP via Getty Images
VIVIAN LIN/AFP via Getty Images
China’s economic growth in recent years has been powered in large part by its roaring real estate market. The real estate industry, directly and indirectly, accounts for as much as 29 percent of China’s entire GDP. This growth has been fueled by a ginormous property bubble and mounting amounts of debt. For a while, China’s national and local governments used their massive powers of command-and-control over the economy to keep the bubble inflating. As is commonly the case in bubbles, investors and companies have taken on massive amounts of debt to capitalize on surging real estate prices. Evergrande itself amassed more than $300 billion in debt, to its banks, its bondholders, its suppliers, and its customers, many of whom pre-bought homes months, even years, before they were built.
2) China’s property bubble has created spooky “ghost cities” and “ghost apartments” throughout the nation
The Chinese property bubble, which observers have been talking about for years, has encouraged more and more speculation, with investors buying up properties with no intention of living in them. Unfinished and vacant buildings and apartments litter the provinces of China. Estimates vary, but around 20%of China’s total housing stock now sits unoccupied. The Financial Times saysthere is now enough vacant property in the nation to house more than 90 million people. That’s enough empty homes to fit the entire population of Canada. Or France. Or Germany.
In some cases, entire urban areas lie empty. These so-called “ghost cities” include replicas of Paris, Venice, and even Jackson Hole, Wyoming.
3) The Communist Party of China is now working to reduce financial risks and change its model for economic growth
BEIJING, CHINA – JUNE 28: Chinese President and Chairman of the Communist Party Xi Jinping appears on a large screen as performers dance during a mass gala marking the 100th anniversary of the Communist Party on June 28, 2021 at the Olympic Bird’s Nest stadium in Beijing, China.
Kevin Frayer/Getty Images
Kevin Frayer/Getty Images
One of the main differences between Evergrande’s debt crunch and the collapse of Lehman Brothers is that this crunch was brought about on purpose. The Communist Party of China (CPC) has been aware of the dangers posed by its wild real estate market for some time. In 2017, President Xi Jinping began signaling he wanted to do something about it with a speech to the 19th Party Congress. He said, “Houses are built to be inhabited, not for speculation.”
Last year, the government followed up with a policy known as “three red lines,” which aims to reduce debt in the property market, crack down on reckless borrowing, and prevent a market correction from turning into a cataclysm. The historian Adam Tooze calls it “controlled demolition” of the real estate bubble.
More broadly, Xi has been pursuing radical new policies in the name of “common prosperity,” an effort to fight growing inequality in China and intervene more forcefully in private industries.
In July, Xi released an essay outlining his ambitions for China. He said he wants the country to focus on “pursuing genuine rather than inflated GDP growth and achieving high-quality, efficient, and sustainable development.” Evergrande, a poster child for excesses of the real estate market, apparently does not represent genuine economic growth. And government policies, which once boosted the company, are now strangling it.
4) Cronyism May Have Lulled Investors and Creditors Into Overconfidence In Evergrande
BEIJING, CHINA – MARCH 06: Xu Jiayin, Standing Committee Member of the 12th CPPCC National Committee and Chairman of the Board of EVERGRANDE Group speaks during a news conference on the sidelines of the fourth session of the 12th National People’s Congress, on March 6, 2016 in Beijing, China. (Photo by Etienne Oliveau/Getty Images)
Etienne Oliveau/Getty Images
Etienne Oliveau/Getty Images
Evergrande was founded by Xu Jiayin, who not that long ago was the richest man in China. Jiayin is well connected. He is a member of the Chinese People’s Political Consultative Conference, an elite group of advisers to the government. He’s also politically shrewd. For example, he reportedly got Evergrande to buy Guangzhou Football Club after President Xi Jinping said he wanted China to have a great soccer team. The company then sank millions buying some of the best soccer players in the world.
The New York Timessuggests that Xu Jiayin’s connections gave investors and creditors confidence that the company could keep borrowing and get bailed out by the government if things went bad. They thought Evergrande was too big and too connected to fail. In August, however, as the company began to wobble, Xu resigned as chairman of Evergrande’s real estate arm, sending it tumbling further.
SHANGHAI, CHINA – AUGUST 29: Boats travel on the Huangpu River as the skyline of the city in the Pudong district is seen on August 29, 2020 in Shanghai, China.
Kevin Frayer/Getty Images
Kevin Frayer/Getty Images
China’s growth in recent years has depended heavily on a gargantuan expansion of real estate and all its accoutrements — trains, bridges and sewers. China has been building and building and building, creating lots of economic activity in the country. With Evergrande, that type of growth is finally showing itself to be unsustainable — and the Chinese economy is in for a period of turbulence. The weird part is this seems to be, in part, by design. We still have questions. How forcefully will China act to contain the damage done by Evergrande? Will China be able to successfully shift its economic model away from real estate and endless development? How will this shift affect the broader global economy? We’ll be paying attention in future weeks.
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OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
