The Collapse of China’s Real Estate Giant Evergrande

The dramatic downfall of China’s second largest property developer Evergrande has sent shockwaves through the country’s real estate market. Evergrande’s struggles to pay its debts and suppliers has highlighted the unsustainable nature of China’s housing boom over the past two decades.

Once hailed as a symbol of China’s economic rise, Evergrande expanded rapidly on shaky foundations. The company relied heavily on pre-sales of properties that were yet to be built, using buyers’ down payments to finance further construction. This model worked as long as property prices kept rising, but faltered when the market slowed.

Evergrande also diversified recklessly, investing in electric cars, sports teams and other ventures. This drained its cash at a time when it was already over-leveraged. Evergrande has racked up over $300 billion in debt that it is now struggling to repay. Its suppliers and contractors have gone unpaid, leaving many projects unfinished.

The roots of Evergrande’s woes reflect systemic issues in China’s real estate market. With limited alternative investments, Chinese households poured their savings into housing, regarding it as a sure bet. Prices soared, fueling a building frenzy. Ghost cities of empty towers sprouted across China.

Developers relied on pre-sales and a Ponzi-like cycle of new investment to fund projects. Local governments also became addicted to land sales for revenue. But housing supply overshot demand, while prices stretched far beyond ordinary Chinese incomes. This distorted market was ripe for a sharp correction.

Beijing will seek to contain the fallout from Evergrande’s unraveling. Banks and investors are exposed to its debts. A disorderly collapse could shake confidence in China’s housing market and the broader economy. However, Evergrande’s demise may finally prick China’s property bubble, helping rebalance the economy to more sustainable foundations. The boom years have passed.