When America sneezes

Evergrande is China’s stress test for the global economy

By Morf Morford

Tacoma Daily Index

You’ve certainly heard the term “When America sneezes, the world catches a cold”.

That phrase summed up not only the economic heft of the United States, but, perhaps even more, the repercussions that might emerge, with even greater impact many miles away, even far out of sight or reach of the original event.

This proverb held true for years, if not decades.

In the 2020s, the pieces on the economic chessboard have shifted.

And now the hulking – and overly influential – economic power with the sniffles is China. At the center of this potential economic tipping point is one of China’s largest real estate developers – Evergrande.

Few Americans had heard of this company – until its debt problems began to shake up the stock market and send even more unwelcome ripples through the global economy.

So who is Evergrande? The company is part of the Global 500 — meaning that it is (or was) also one of the world’s biggest businesses by revenue.

Listed in Hong Kong and based in the southern Chinese city of Shenzhen, it employs about 200,000 people.

It also indirectly helps sustain more than 3.8 million jobs each year.

Evergrande made its name in residential property — and on their website, it boasts that it “owns more than 1,300 projects in more than 280 cities” across China — but there is more. Much more.

Evergrande has its hands in electric vehicles, sports and theme parks. It even owns a food and beverage business, selling bottled water, groceries, dairy products and other goods across China.

It’s currently working on creating the world’s biggest soccer stadium in Guangzhou (southern China), assuming that construction is completed in 2022, as expected.

The $1.7 billion site is shaped as a giant lotus flower, and will eventually, if completed, be able to seat 100,000 spectators.

But Evergrande’s focus has been real estate.

And in China, with the largest share of the world’s population, real estate has been a hot market.

And real estate, as we all know, takes a huge amount of investment – in time, resources and, of course, cash. The slightest hiccup can set off repercussions that reverberate across borders, industries and economies – including stock markets, pension funds and supply chains.

Evergrande has had a series of hiccups which has led to economic chaos – including a debt of well over $300 billion (USD) which is about the same as the combined wealth of Amazon founder Jeff Bezos, Microsoft founder Bill Gates and investor Warren Buffet.

For a little perspective, the GDP of Hong Kong was a shade under $350 billion in 2020 (https://countryeconomy.com/gdp/hong-kong). Denmark’s economy is only a bit larger.

In other words, this one company has almost as much debt as the GDP of several entire countries.

For most businesses, and many individuals, cash flow is a perennial problem.

For a business on the scale of Evergrande, being over extended can be catastrophic.

The price of shares in Evergrande, for example, have dropped more than 80% just this year.

If you want to take part in this crazy stock market, as of September 22, you could buy Evergrande stock at twenty-nine cents a share.

And the real estate market, after growing for years, especially residential property in China, is entering an era of sustained decline.

Can we expect the same here?

China, like many countries across Europe and Asia, and to a degree North America, is experiencing a birth decline and either a stable population or even a drop, but either way, the economic forecast for large scale builders is not promising.

China has a host of unique characteristics from a high level of state run businesses (including banks) strict birth control laws and an unprecedented economic growth rate for the past few decades,

China’s central bank could step in and stop the bleeding and keep the company’s defaults from spreading into (or beyond) the national banking system.

China’s media describes Evergrande as an economic “black hole” that will absorb any amount of money.

The American (and other) stock markets have been swirling up and down in the triple digits in response.

If a (likely) default occurs, will it be confined to the real estate industry? China? Asia?

The Chinese bond market could be hit and the resulting loss of confidence could easily spill over to the broader property sector. Or even beyond.

2020 and 2021 have already given us more than our share of local and global economic shakes, ripples or even cardiac arrests. We can only hope that the repercussions don’t hit us too hard.

In the old days, a decade or two ago, or even just a few years ago, what happened in China stayed in China.

Those days are long gone.

This is far from a sniffle.

This is a debt load the size of the GDP of an entire country.

Stay tuned.

And hang on for the ride.