August 12, 2022

China’s Evergrande Debt Crisis: Who will be Affected?

The company is one of China’s largest property developers, but it has been dogged by scandal recently. It was recently revealed that its chairman had hidden $130 million worth of personal assets overseas just before the company went public on the Shenzhen Stock Exchange in 2010. Investors have called for investigations into Evergrande’s finances to find out more about what they say is insider trading and fraud at the firm.

The crisis at Evergrande doesn’t just illustrate how individual Chinese investors are now on the hook for personal debts thanks to shadow banking practices, it also shows how one of China’s largest developers is now struggling to find enough cash for new projects. At the same time, rising land prices are making it harder for homebuyers to afford the down payments typically required by Chinese banks, which means construction loans are more important than ever.

But Evergrande isn’t alone in its struggles, and it certainly isn’t the biggest Chinese developer with debt problems. Far from it.

The map below shows household debt in China’s major cities. The darker orange areas indicate where more than 25 percent of households are estimated to be in debt (and not all of that is exactly high-grade borrowing). Scroll over the area for details on the cities, and click each one to see what sort of economic problems that debt could be creating.

The estimate of household indebtedness uses a conservative approach to calculate how many Chinese are carrying some sort of debt, according to Li Shi, the survey’s director.

The level of indebtedness depends on where one lives in China, according to the estimates by Professor Li. “We found that there is a difference between urban and rural areas,” he said, adding that Chinese living in more urbanized cities were less likely to be carrying debts.

The survey also estimated how much of China’s household wealth is currently tied up in the country’s property bubble. According to Li, Chinese families are trying to control the level of their indebtedness by ensuring that at least 20 percent of their assets are liquid. However, he said this meant that around 30 percent of households have nothing but real estate to their names.

This lack of diversification is risky for Chinese households, given that property prices have been falling in some areas and rising rapidly in others since the start of the year. China’s housing market has long been a source of financial and political instability within China and around the world as well. The government’s move to tighten credit conditions this summer initially sent property prices falling before it was forced to re-open the credit spigot.

China’s household debt is only a fraction of the size of its total debts. Government and corporate obligations make up 83 percent of China’s overall debt (including shadow banking) according to data from the US Federal Reserve Board . But with around 70 percent of household wealth tied up in property, it’s not hard to understand why China has called the housing market one of its “top priorities” for reform.

Evergrande is only the most obvious evidence that Chinese developers are struggling with low levels of liquidity. According to Standard & Poor’s , around 35 percent of all property developers are at risk of