One of the largest Chinese real estate companies, Evergrande, filed for bankruptcy last week, which could have a significant impact on the future of the American and global economy.
The company requested Chapter 15 bankruptcy protection in a New York court last Thursday, seeking the court to recognize its current efforts to restructure the company. If approved, the bankruptcy would allow the company to avoid lawsuits during the restructuring process.
The company is currently attempting to reshape itself in talks occurring in the Cayman Islands, Hong Kong and the British Virgin Islands. The company hopes for approval of its reshaping plan from two of the three courts next month.
The company is facing a combination of factors leading to its current difficulty. China’s economy is slowing and is heavily dependent on its construction sector.
Evergrande is currently one of the most heavily indebted real estate companies on the planet. It has $330 in liabilities. China has been in the potential jeopardy of a real estate sector crash for several years.
Since 2021 a significant number of China real estate companies have defaulted, including Evergrande that year.
The company is also showing possible signs of insolvency, with a combined loss of $81 billion in 2021 and 2022.
— Reuters (@Reuters) August 18, 2023
Beijing has taken steps to try to prop up its ailing real estate sector, including lowering its lending rates. The People’s Bank of China lowered its one-year loan prime rate from 3.55% to 3.45%. It left its five-year rate the same.
The Chinese government is in a difficult position due to its currency losing value on the open market. With increasing price pressure on the yuan, Beijing risks further economic instability by cutting rates. The People’s Republic actually saw prices fall in July, a sign that the worsening economic situation is leading to deflation.
The fine line the country’s government has to tread to try to head off a real estate crisis may show the depth of how difficult the underlying problem is.