Impending huge bankruptcy: Evergrande is not Lehman

The Evergrande Group’s crisis in China is causing stock market prices to collapse. Investors fear a global shock like after the bankruptcy of the US investment bank Lehman Brothers. But the risks are different.

The impending collapse of the real estate company Evergrande: It cannot be compared with the Lehman Brothers bankruptcy in the USA 13 years ago. Unlike then, there is no danger in China that an end to Evergrande would trigger a worldwide chain reaction. The Chinese financial market remains largely isolated from the rest of the world, and the current crisis is evidence that that’s not necessarily a bad thing, either.

Fear of bankruptcy unsettled

Even so, the Evergrande crisis could have a negative impact on the global economy. Firstly, the prospect that one of the largest and most influential private companies in China could go bankrupt is causing international uncertainty – with the result that stock market prices will collapse worldwide.

Second, the real estate group Evergrande is a de facto systemically important company in the People’s Republic. Analysts estimate that the real estate industry is currently responsible for around a third of the Chinese economic output in the People’s Republic.

Worries about growth

A bankruptcy of the Evergrande corporation would plunge the entire industry into a crisis – with the result that countless suppliers and construction companies would also have to file for bankruptcy. Raw material prices would fall worldwide. Unemployment would also rise in China, at least in the short term. Hundreds of thousands of people would have to write off real estate down payments already made. Economic growth in China would give way if Evergrande went bankrupt – with repercussions for the rest of the world. Export-oriented countries like Germany in particular are dependent on China’s economy growing; that people build and consume vigorously.

Because the Evergrande Group is so important to China, the state and party leadership will probably not let the company slide uncontrollably into bankruptcy. It is quite possible that the authorities will deliberately let some parts of Heng Da – the Chinese name of the group – go bankrupt in order to set an example and show the rest of the industry that the times of excessive growth on credit are over. Other parts of Evergrande, however, are likely to be absorbed by the state so as not to leave the around 1.2 million property buyers across the country out in the rain. The Chinese government is concerned with absolute stability. Protests by those affected, as in previous days in front of the Evergrande headquarters, will only be tolerated as long as they do not get out of hand.

The state leadership has the final say

It is difficult to predict exactly what a solution to the Evergrande debt crisis might look like. That this is the case is also due to the peculiarities of China: The People’s Republic is neither a free market economy nor a constitutional state. The communist government always has the last word on important economic decisions. It is therefore quite possible that in the Evergrande crisis she will conjure up a solution that does not make sense from a purely economic point of view and that outsiders cannot really understand exactly how it works.

There are no corresponding questions in China because the country’s media are also completely controlled by the communist government. Ultimately, China’s state and party leadership is likely to use the Evergrande crisis to convey to the population that the private sector cannot be trusted – and that only the state and the Communist Party ensure reliability in China.