1986 Japan. 2008 the United States. 2021 China. The world has seen its fair share of housing bubbles—although no two are the same. Now, Evergrande’s looming $300 billion debt amidst China’s “Three Red Lines,” which attempts to curb China’s loose lending policies, may flatten the country’s economy—as the housing crisis in Japan and the US did. However, to fully understand Evergrande’s current position, we must examine its ascent to the status of one of China’s largest developers.
In 1996, as China’s opening-up policy blossomed, Xu Jiayin founded Evergrande with a 110,000 square meter agrochemical plant and converted it into affordable housing for China’s quickly urbanizing population. According to the World Bank, China’s urbanized population grew from 26% in 1990 to 61% in 2020. Therein, Evergrande expanded eventually toward China’s regional cities, borrowing heavily and spreading itself thin. In 2006, it held $1.2bn in assets and $1bn in liabilities, a figure which multiplied to $178bn when the company IPO-ed in Hong Kong. This jump mirrored Chinese bank’s loans, which grew by $9.59 trillion RMB. This loan fueled China’s per capita GDP growth from 3,832.610 in 2009 to 10, 499.705 in 2020 according to CEIC. Moreover, Nikkei Asia reports China’s debt-to-GDP ratio at 220%—greater than Japan’s 218% during its housing bubble.
Loose-lending fostered China’s growth, including its housing markets, which account for 29% of its GDP, according to the Financial Times. Now, that policy might be writing the sector’s demise. In an effort to promote greater financial health and create a more equitable economy for the country, President Xi Jinping enacted the “Three Lines Policy” in August 2020. As its namesake suggests, China set three boundaries that if crossed limited borrowers access to lending from Chinese banks: “(1) a cap on the asset-liability ratio to 70%, (2) Net-gearing ratio of less than 100%, and (3) Cash-to-short term debt ratio above 1x,” as summarized by UBS. Lines that Evergrande unequivocally crossed.
Without access to capital to expand, Evergrande pivoted to pre-selling property—a risk falsely minimized or incorrectly overseen by the housing market’s quick growth. Nonetheless, the market’s prices have largely outpriced average income by 57x in major cities according to the Rushi Advanced Institute of Finance. This has left nearly 20% of Chinese property uninhabited, as The Wall Street Journal reported. Now, having defaulted on its bonds three times, Evergrande’s future and the future of 1.6 million undelivered homes are precarious. Thus, China’s sudden tightening on lending might’ve written one of its main industries demise—an issue that could expand to other sectors.