The Daily - A Threat to China’s Economy

Episode Date: October 25, 2021

Every once in a while a company grows so big and messy that governments fear what would happen to the broader economy if it were to fail. In China, Evergrande, a sprawling real estate developer, is that company.Evergrande has the distinction of being the world’s most debt-saddled property developer and has been on life support for months. A steady drumbeat of bad news in recent weeks has accelerated what many experts warn is inevitable: failure.But will the government let the company fail? And what would happen if it did?Guest: Alexandra Stevenson, a business correspondent based in Hong Kong covering Chinese corporate giants.Love listening to New York Times podcasts? Help us test a new audio product in beta and give us your thoughts to shape what it becomes. Visit nytimes.com/audio to join the beta.Sign up here to get The Daily in your inbox each morning. And for an exclusive look at how the biggest stories on our show come together, subscribe to our newsletter. Background reading: The property giant’s success mirrored the country’s transformation from an agrarian economy to one that embraced capitalism. Its struggles offer a glimpse of a new financial future.Evergrande isn’t the only Chinese real estate developer in trouble — another, Fantasia Holdings Group, recently missed a key payment to foreign bondholders, heightening the persistent fears of a coming crisis in China’s real estate sector.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

From The New York Times, I'm Michael Barbaro. This is The Daily. We begin in China, where embattled real estate giant Evergrande faces a major moment of truth this week. One of the biggest and most important corporations in China, which both fueled and profited from the country's historic housing boom. Shares in the highly indebted company have fallen 80% this year. Is now on the brink of collapse.

Analysts fear the crisis could spread throughout China's property sector and the entire economy. Raising fears of a broader financial crisis in a country that prides itself on stability and control. Evergrande was always thought to be too big to fail. Now, where have we heard that one before? Today, I spoke to my colleague, Alexandra Stevenson, about the rise and fall of Evergrande. It's Monday, October 25th. Alex, most of us have never heard of this company, Evergrande. But my sense is that if you live in China, it's a household name. And I know that you have been reporting on this company for a really long time.

So what should we know about it? Yeah, Evergrande is a household name in China. It's actually one of the country's most prolific developers. And its properties are in hundreds of cities across the country. Its rise and the rise of its founder, Xu Jiayin, really mirrors that of China's entire economy. And it tells the story of China's early embrace of capitalism. And Xu's story is also really interesting. He grew up poor in a rural village in the central province of Henan.

He has described in speeches memories of eating sweet potatoes and sweet potato flour and just being sick of sweet potatoes and studying under a thatched roof that didn't keep out wind or rain. He has described how he went on to become a steel factory technician at a state-owned enterprise because it was still at a time when China's economy was mostly centrally planned. But as he's sort of going through those early years in the workforce, China's beginning to talk about opening up. And in 1996, a little more than a decade after he starts out, he decides he's going to set up his own business in the city of Shenzhen,

which at the time was a special economic zone that China's leader Deng Xiaoping had first chosen as the place to launch an experiment with capitalism. And so Evergrande is born there. And so at that time, China was just embarking on this massive project of moving hundreds of millions of people from the countryside to the cities and creating new cities out of dirt villages.

And as they're doing that, Shu is selling the dream of home ownership to a very small but starting to grow middle class. And as China urbanizes, Evergrande kind of expands beyond Shenzhen to really all corners of China, building towards this, what ends up being this remarkable property boom that China sees for decades.

Describe that property boom. China's property boom has been a wild ride. Skyscrapers, shopping malls, high speed trains, even new cities are popping up. Every year, 20 new cities are built from scratch in China, each with more than a million people. And for anybody who's ever gotten on a train and gone from one city to another in China, you can see cranes dot the skyline amid new plazas, parks and housing developments. Just hundreds of cranes as you come into any city, and huge, sprawling property developments, always under construction.

Just in the last few years, China has used more cement than the United States did in the entire last century. One of the things, the first time that I went to Beijing in the mid-2000s, was just being shocked that one week there's just like a dirt plot, and then the next week something is there in its place, multi-story building, and it's just the skeleton, but it's already gone up. And a lot of the property developers in China will throw up these towering banners with images of Central Park or kind of iconic places around the world in major cities to sort of associate themselves with success. Central Villa District, Beijing. World-class villas of contemporary China. And Evergrande itself was selling this lifestyle associated with names like Cloud Lake Royal Garden, Empire View, Luxury Palace.

Enjoying a good reputation for the popular international school district. And so SHU and Evergrande were part of that boom of selling this idea to what was becoming a burgeoning middle class. So they're not just selling apartments. It sounds like they're selling an idea of success and happiness very effectively. Yeah, they're selling wealth, this idea of wealth and prosperity. And suddenly before you know it, Evergrande has built millions of individual apartments across the country. And so by 2009, it's big enough that it decides to go public in Hong Kong and it raises over $700 million. And this opens up the doors to a whole new world of financing from Wall Street and from other global financial capitals outside of China. And it's also when Xu starts to dabble in new areas of business

and he starts to make trophy purchases. We're going to start with football and Chinese side Guangzhou Evergrande. Like a soccer team in 2010. They signed Colombian forward Jackson Martinez for a record fee. And he's dumping up millions of dollars for foreign players. The transfer from Atletico Madrid

is the biggest in the history of the Chinese Super League. And he gets into dairy and then he gets into oil and pig farming. Wow. And eventually, he even starts an electric vehicle company that promised to be bigger and better than Tesla.

And there's this scene in a recent memoir from a Chinese businessman named Desmond Shum. The book is called Red Roulette. And in it, Xu takes a trip on a private jet with some friends. They fly to Paris. And then when they get there, they spend an evening downing like $100,000 worth of Chateau Lafitte wine. Wow.

And later they take this trip to the French Riviera where Xu is like considering buying a yacht for a hundred million dollars that's owned by this Hong Kong mogul. Hundred million dollar yacht after a hundred thousand dollar wine spree. Yeah. I mean, this is like a hundred thousand dollars has changed for this guy at this point in his career. And it's this scene that kind of really illustrates just how Xu and his company rode this tremendous property boom in China,

unlike any that the world had ever seen. And he was at the center of it. And by 2018, Xu is China's richest man. But the problem is, the property boom becomes based more on speculation than true demand. What do you mean? At some point in the past decade, basically, the government loses control. And it's Evergrande and other developers who are actually fueling the speculative activity in the property market. And for a while, it didn't matter because everyone was benefiting. So you had local governments who were selling land to developers who were benefiting.

You had investors who kept lending to companies like Evergrande who were benefiting. And you had households who really had very few other options for where to put their savings, putting it into property. And they were benefiting because prices kept going up and up and up. But all that speculative activity led to more apartments in China than there are people who could possibly live in them. And it also created some of the most unaffordable property in the world. So now you have a situation where young people who are just starting out can't possibly imagine actually ever being able to own a place to call home. So it's hard for them to see how things are getting better. And if young people don't see possibility in their future, that causes a much bigger problem

for the Communist Party and for the government as a whole. So the problem is that Evergrande is leading a speculative housing bubble, and that is leading to social inequality. Exactly. And the problem for Evergrande was that in participating in this housing bubble, it had borrowed an unbelievably large amount of money, $300 billion, making it the most indebted real estate developer in the world. But then August 2020 happens, and the central bank goes, enough is enough, and basically cuts off lending to developers like Evergrande and forces them to start addressing their debt and start paying it off. So at this point, Evergrande is running out of options

for ways to find cash. The banks are no longer lending to it. And so there's really nowhere for Evergrande to turn. And a lot of people, a long line of people outside their door asking for money and asking for it now. So this is starting to look like a company that's on the verge of financial collapse. Yes.

And how does the world come to understand that? Well, it's actually not until this summer, Well, it's actually not until this summer in August when authorities summon Evergrande in for this meeting. And then they issue a statement afterwards. And it's short and terse, but it hints at how Beijing sees Evergrande, that it's kind of this corporate bad doer and that it might be made an example of. And so that's when the panic really starts to begin. And suddenly people start worrying and the rumor starts that Evergrande is actually on the verge of bankruptcy. And that's when we start reaching out to people whose lives have been affected,

and in some cases destroyed, by Evergrande. We'll be right back. So Alex, tell us about these people that you met whose lives have been upended by the problems inside Evergrande. So in August, we start trying to find as many people as we can who we think may have been affected by Evergrande's crisis. And so we start with homebuyers and we find this guy named Wesley Jong. He's 34 years old and he tells us that four years ago he bought an apartment that hadn't been completed yet. an apartment that hadn't been completed yet. And at the time, he puts down $138,000,

which is basically the life savings of his parents and some of his own savings. And then he starts making monthly mortgage payments on top of that. And at this point, he's made more than 40 monthly payments. And it's four years later, and he still hasn't seen the apartment. It's not finished. Wow. And so what we learn in our reporting is that this guy, Wesley Zhang, is actually just one of some 1.6 million people who, just like him, put money down for an apartment that Evergrande, because of its problems, has not been able to finish. So there are now a lot of people who have poured their life savings into homes and into the dream that Evergrande has created of a middle-class existence, and they've gotten nothing in return. Yeah, it's a lot of angry homebuyers. thing in return. Yeah, it's a lot of angry homebuyers. And we start talking to other people who are affected by Evergrande. And we come across this contractor named Yong Zhusheng, who's from

a city in central China. And he and his workers finish their job with Evergrande in May. their job with Evergrande in May. But he tells us that he hasn't been paid since February. And at this point, Evergrande owes him half a million dollars. Wow. And it's not just him, because he's hired a bunch of workers to help him with the job. And at this point, he's worried that his whole business is basically going to collapse. And at this point, he's worried that his whole business is basically going to collapse. And so that's the story of homebuyers and contractors who are affected by Evergrande. But what really surprised us at this point in our reporting was that employees also were deeply affected by Evergrande's troubles. So we come across this guy named Jin Chung, who's 28, and he works for Evergrande in the eastern city of Hefei. And he tells us in April of this year,

his bosses basically said, you need to stump up a certain amount of money. For him, it was $62,000. And invest it in this high-interest investment product, but give us the money. So it was basically like a short-term high-interest loan. And we later learned that 70% to 80% of Evergrande employees across the country were told that they needed to hand over some amount of money as a loan. And that if they didn't come up with that money, that their bonus would be docked. So it was sort of strong-armed, right? And Jin Chung, the employee we spoke to, told us that he didn't feel like he had an option.

So Evergrande is forcing its employees to bail out their employer because it has so recklessly been borrowing and has run out of money. That's right. And many employees said they borrowed from parents and in-laws. Some said they put in hundreds of thousands of dollars. And some of these high-interest loans that were packaged as investment products, they were meant to be paid in September. And so everything's starting to come to a head. Evergrande has been chastised by the government. Rumors of its bankruptcy are spreading on the internet. And at the same time, they're telling employees who are expecting their money back, plus an interest, that they have to wait.

And so that's when employees start panicking. And that's when they start joining others, homebuyers and contractors, suppliers, in actually protesting. Like actual protesting on the streets? Yeah, which is unusual for China. on the streets? Yeah, which is unusual for China. We're talking groups of 50 or 100. These aren't massive protests,

not like what you might think happens in the U.S. But there's one scene at one point where investors and homebuyers crowd into the lobby of Evergrande's headquarters in Shenzhen. And it's super chaotic. And outside, you just see these police with these giant riot shields. And it disappears as quickly as the protest started. And then all we see after, for days later, are the police officers with their riot shields outside the headquarters of Evergrande. So this is more than just a company imploding at this point, if you're the Chinese government. This has all the makings of potentially social unrest, something that is very, very unusual

in China. And at this point, Evergrande is really starting to run out of money and out of time. And this is sort of mid-September. It hasn't been able to raise money by selling off parts of its business. It's also run out of other ways to find money, like tapping employees. And probably more important than anything else, no one is buying any of its apartments. And that's when things get really bad. Because Evergrande is days away from this deadline for a really important interest payment that it owes to foreign investors. And that day comes. There was no sign that airline Chinese developer Evergrande paid $83 million in interest payments it owed offshore bondholders.

And Evergrande doesn't make the payment. The Thursday deadline for the payment came and went with complete silence from the firm. So at this point now, Evergrande is at risk of defaulting. And the whole world is now watching and you start to see headlines raising the question. With liabilities of $305 billion, Evergrande has sparked concerns of a messy collapse. If Evergrande defaults on its debt. That could spread through China's financial system and reverberate around the world. Is this going to lead to some kind of financial crisis in China? So Alex, explain that. How could the collapse of Evergrande produce a larger financial crisis

in China? How would that work? Well, consider this scenario. So Evergrande disappears. Well, consider this scenario. So Evergrande disappears. And that spills over into the broader housing market. And you start to see properties lose value. Then you see new property prices start to plummet. Then homes start to become worth less than the mortgages that people are paying on them. And then there are all the companies and the banks and the financial institutions that Evergrande owes money to, and they start to find themselves

in trouble. And then finally, panic starts to set in. Doubts grow about all these other companies like Evergrande that have so much debt that maybe they can't go on either. And so that's the thing about financial panic. It's all about fear and emotion. And those are things that are really hard to contain. Right. So the problem is if Evergrande goes under, lots of people get hurt, which is part of the financial crisis. But the part of a financial crisis that would be hard to predict would be the fear that there are lots of little Evergrandes dotted around the Chinese economy. And if that fear starts to grow, that's what a financial crisis would look like. People might pull their money out of those companies. Investors might demand their money back. And all of a sudden, the entire Chinese economy is on the brink of some sort of collapse. Yeah. And in that scenario, it's kind of like what we saw in the U.S. in 2008, which was a big shock to one industry suddenly undermining confidence in an entire economy. So I have to imagine that China has some kind of a plan to help Evergrande get through this

and avoid that nightmare scenario you just outlined, Alex. And so are they gearing up the Chinese government to essentially bail out Evergrande? That's the thing. Not necessarily. We don't actually know what the government is going to do. There's actually a very good chance that China will let Evergrande fail.

So why would that be? Why would China not bail out Evergrande? Because China thinks that it can actually avoid that nightmare scenario. I think the Communist Party believes it has the power to eventually pay the contractors and make sure that all the suppliers

that Evergrande owes money to will in some way get some of the money they're owed. That the homebuyers who are waiting on apartments, that those apartments ultimately get built by someone. Because the last thing that the Communist Party is willing to sacrifice is political instability. If that means making sure that ordinary people are made somewhat whole in the fallout of this,

they will go to extraordinary lengths to make sure that happens. What they fear is that in bailing out Evergrande, they will be sending a message to companies that don't pay their debts that they will be bailed out if they borrow too much. And in this scenario, China's property market just keeps getting bigger and bigger and prices go up and up. And that gap that already exists between the rich and poor just gets bigger. And that is just not good for China, because China on a better, healthier, more sustainable,

fairer, more equal economic path that is in line with what the Chinese Communist Party says are its values. And so China can live with the potential short-term pain of an Evergrande collapse, because what it gets in return is just a better long-term China. Yeah, that by letting Evergrande fail, maybe China can start to move its economy away from this speculative model of borrowing and borrowing that has created these huge bubbles. So at the end of the day, what does all of this say about the Chinese economic experiment

that started 40 years ago, as you told us, and that Evergrande and its founder have really come to embody? Does this in some ways mean that that economic experiment has failed? Does this in some ways mean that that economic experiment has failed? It's hard to say that the past 40 years of China's economic growth has been a failure if you just look at all the people who have been lifted from poverty. I think the better way to look at it is that this moment is a test for just how socialist China is. You know, it's run by the Chinese Communist Party, but for four decades, it's really been, in many parts of the economy,

just the Wild West in terms of capitalism. This change that needs to happen in this moment in time is a test of whether the Chinese Communist Party is really serious about its socialist roots. You know, this idea that everybody should partake in the wealth of the country. Hmm. Because what happened with Evergrande was not adhering to that socialist vision. I mean, I think if you look at Xu at the height of his success, there was an incredible amount of excess. For somebody to be able to, on a whim, spend $100 million on a yacht, that's not really in line with kind of core socialist principles.

What's also happening in the backdrop here at the moment is China's leader, Xi Jinping, is talking a lot about this idea of common prosperity. And it's not new. It's something that Mao talked about and every Chinese leader has talked about. But it could actually mean something right now. Because if China, let's say, can fail and the authorities are serious about pivoting its economy and creating a society where wealth is more evenly distributed,

that would get the party a little bit closer to its theoretical roots. Well, Alex, we appreciate your time. Thank you very much. Thanks so much. On Friday, Evergrande narrowly avoided defaulting on its debt by making an overdue financial payment at the last possible moment. But in a securities filing, the company acknowledged the severity of its financial troubles,

writing, quote, We'll be right back. Here's what else you need to know today. I think we're pretty much there now. You think you have a deal now? We're almost there. It's just the language of it. On Sunday, House Speaker Nancy Pelosi told CNN that after nearly a month of tense negotiations, Democrats are on the verge of a deal to pass a historic bill that will expand the social safety net as soon as this week. It is less than we had was projected to begin with,

but it's still bigger than anything we have ever done in terms of addressing the needs of America's working families. The bill had started with a price tag of nearly $3.5 trillion, but is expected to be trimmed down to a cost of less than $2 trillion at the urging of two moderate senators, Joe Manchin and Kyrsten Sinema. The spending bill is expected to be passed in tandem with a $1.2 trillion infrastructure bill, which together represent the centerpiece of President Biden's domestic agenda. Today's episode was produced by Luke Vanderplug, Stella Tan, and Alexander Lee Young.

It was edited by Lisa Chow and Mark George and engineered by Chris Wood. Special thanks to Joy Dong. Our theme music is by Jim Brunberg and Ben Landsberg of Wonderly. That's it for The Daily. I'm Michael Barbaro. See you tomorrow. Brunberg and Ben Landsberg of Wonderly. That's it for The Daily. I'm Michael Bilbaro. See you tomorrow.