As Evergrande Crumbles, Will China’s Economy Collapse?

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Sep. 20 2021, Published 11:42 a.m. ET

It's not a new question. In fact, Will China's Economy Collapse? is the title of a 2017 political science essay by Ann Lee. However, given the recent struggle for property developer giant Evergrande, a company carrying potentially insurmountable debt, the inquiry takes on new meaning.

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Amid a major shift for heavily indebted real estate companies, what's next for the Chinese economy and the people it operates for?

The Evergrande situation incites global fear

china
Source: Getty Images

Xi Jiayin, Evergrande chairman

In the U.S. stock market, the Dow Jones fell 1.5 percent, or 500 points, at opening. While Evergrande mucks through a sticky debt situation—in which it owes $300 billion it must pay back immediately or risk defaulting—global markets are responding.

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Evergrande has numerous loan payments due today, Sep. 30, with banks not expecting to receive interest payments. The company owes a total of $84 million in bond interest by Sep. 23.

Evergrande's Hong Kong-listed stock fell more than 10 percent today, adding to its one-month decline of nearly 50 percent.

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What happens to China's economy if Evergrande defaults?

Evergrande has its hands in a lot of pots, which means the Chinese economy could suffer tremendously if it defaults on its debt.

First, there are all of the investors who hold a stake in the partially or completely unfinished properties that Evergrande has started. Then there are all of the construction companies, designers, and material suppliers (just to name a few) that Evergrande owes money to. The ripple effect would definitely be regional in and around Beijing, if not international.

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Ultimately, it's not just Evergrande dealing with debt, but the property sector in China as a whole. The grander issue poses serious implications for the domestic economy.

The likelihood of Evergrande defaulting is high, but China could interfere

While it's highly likely that Evergrande defaults based on the extreme level of debt, the odds of China allowing a catastrophic economic impact is low. The Chinese government could replace Evergrande executives entirely and restructure the company in a way that has the least impact.

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A bailout is not a given but a possibility, considering Evergrande's sheer size (the "too big to fail" mantra rings loud and clear in situations like this).

Despite global fears, China's economy would feel the biggest impact

In step with a typical "September selloff," the Dow has fallen for three weeks in a row. While China isn't everything behind the decline, its fickle property sector plays a part. However, experts expect the economic impact to largely stay within China.

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Ed Yardeni, president and chief investment strategist of Yardeni Research, said on Yahoo! Finance Live, "Especially over the past year, we've seen that the government, the Chinese Communist Party, which really runs the country, has intervened in the marketplace. They've definitely moved away from any sort of concept of free market capitalism to more and more state control."

Meanwhile, investors are shying away from Chinese investments as a hedge against the potential economic collapse.

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