China’s Real Estate Bubble Threatens the World Economy — But It Likely Won’t Pop Now
Evergrande, like so much of China's real estate sector, has been running largely on ever-borrowing, under the implicit assumption that the rewards of massive borrowing in order to grow very big very fast are well worth the remote possibility of potential future risks.
But now the risks of enormous borrowing have become very real for housing giant Evergrande, whose investors are seeing the value of their bonds evaporate as vacant Evergrande's properties go unsold and more go unbuilt. Evergrande's collapse could easily spill over to other Chinese companies that supply concrete, steel, and other construction materials. In addition to pushing up pockets of local unemployment, other countries that supply materials, such as coal and iron, may also feel some pain.
Of course, this is just one Chinese company, although very big, now going down. Much of the rest of China's economy is in various degrees of similar danger due long term massive borrowing, especially for real estate. Today, more than 60 million apartments sit empty in China. No buyers. No renters. Just investments" that have little chance of making good on the biggest real estate bubble in the world, without the Chinese government eventually stepping in to bails them out.
China certainly can continue, like the US, to kick the can down the road with continued massive money printing and borrowing. But just as in the US, at some point it's all going to end. Beyond its housing bubble, China has also borrowed enormously to build mega airports, highways, and all sorts of infrastructure.
The broader Chinese economy, along with its stock and bond markets, all now depend on keeping China's real estate, debt, and other bubbles going. As the demise of Evergrande shows, that is hardly guaranteed. Even in China, bubbles can't last forever.
For more information on the fall of Evergrande and its potential risks to the rest of the world, click on the link below to the Wall Street Journal article:
https://www.wsj.com/articles/evergrande-is-chinas-economy-in-a-nutshell-11632233862?st=88fql53x9vd8znl&reflink=article_email_share