A Threat to China’s Economy

[0] From the New York Times, I'm Michael Barrow.

[1] This is a daily.

[2] We begin in China, where embattled real estate giant Evergrand faces a major moment of truth this week.

[3] One of the biggest and most important corporations in China, which both fueled and profited from the country's historic housing boom.

[4] Shares in the highly indebted company have fallen 80 % this year.

[5] Is now on the brink of collapse.

[6] Analysts fear the crisis could spread throughout China.

[7] China's property sector and the entire economy.

[8] Raising fears of a broader financial crisis in a country that prides itself on stability and control.

[9] Evergrand was always thought to be too big to fail.

[10] Now, where have we heard that one before?

[11] Today, I spoke to my colleague, Alexandra Stevenson, about the rise and fall of Evergrand.

[12] It's Monday, October 25th.

[13] Alex, most of us have never heard of this company Evergrand, but my sense is that if you live in China, it's a household name.

[14] And I know that you have been reporting on this company for a really long time.

[15] So what should we know about it?

[16] Yeah, Evergrand is a household name in China.

[17] It's actually one of the country's most prolific developers.

[18] And its properties are in hundreds of cities across the country.

[19] Its rise and the rise of its founder, Shu Jia Yin, really mirrors that of China's entire economy.

[20] And it tells the story of China's early embrace of capitalism.

[21] And Xu's story is also really interesting.

[22] He grew up poor in a rural village in the central province of Hunan.

[23] He has described in speeches, memories of eating sweet potato.

[24] and sweet potato flour and just being sick of sweet potatoes in studying under a thatched roof that didn't keep out wind or rain.

[25] He has described how he went on to become a steel factory technician and a state -owned enterprise because it was still at a time when China's economy was mostly centrally planned.

[26] But as he's sort of going through those early years in the workforce, China's beginning to talk about opening up.

[27] 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 a place to launch an experiment with capitalism.

[28] And so Evergrand is born there.

[29] 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.

[30] And as they're doing that, Shu is selling the dream of home ownership to a very small but starting to grow middle class.

[31] And as China urbanizes, Evergrand 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.

[32] Describe that property boom.

[33] China's property boom has been a wild ride.

[34] Skiscribers, shopping malls, high -speed trains, even new cities are popping up.

[35] Every year, 20 new cities.

[36] are built from scratch in China, each with more than a million people.

[37] 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.

[38] Just hundreds of cranes as you come into any city and huge sprawling property developments, always under construction.

[39] Just in the last few years, China has used more cement than the United States did in the entire last century.

[40] 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.

[41] And a lot of the property developers in China will throw up these.

[42] powering banners with images of Central Park or kind of iconic places around the world in major cities to sort of associate themselves with success.

[43] Central Villa District, Beijing, world -class villas of contemporary China.

[44] And Evergrand itself was selling this lifestyle associated with names like Cloud Lake Royal Garden, Empire View, luxury palace.

[45] Enjoying a good reputation for the popular international school district.

[46] And so Shu and Evergrand were part of that boom of selling this idea to what was becoming a burgeoning middle class.

[47] Evergrandly gone.

[48] Out of the ordinary in the world.

[49] So they're not just selling apartments.

[50] It sounds like they're selling an idea of success and happiness very effectively?

[51] Yeah, they're selling wealth, this idea of wealth and prosperity.

[52] And suddenly before you know it, Evergrand has built millions of individual apartments across the country.

[53] And so by 2009, it's big enough that it decides to go public in Hong Kong and it raises over $700 million.

[54] 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.

[55] And it's also when Shu starts to dabble in new areas of business.

[56] And he starts to make trophy purchases.

[57] We're going to start with football and Chinese -signed Guangzhou Evergrand.

[58] Like a soccer team in 2010.

[59] And they signed Colombian forward Jackson Martinez for a record fee.

[60] And he's dumping up millions of dollars for foreign players.

[61] The transfer from Athletica Madrid is the biggest in the history of the Chinese Super League.

[62] And he gets into dairy and then he gets into oil and pig farming.

[63] Wow.

[64] And eventually.

[65] He even starts an electric vehicle company that promised to be bigger and better than Tesla.

[66] Hengda, new energy engine engine, car.

[67] And there's this scene in a recent memoir from a Chinese businessman named Desmond Shum.

[68] The book is called Red Roulette.

[69] And in it, Shue takes a trip on a private jet with some friends.

[70] They fly to Paris, and then when they get there, they spend an evening downing like $100 ,000 worth of Chateau Lafitte wine.

[71] Wow.

[72] And later they take this trip to the French Riviera where Shue is like considering buying a yacht for $100 million that's owned by this Hong Kong mogul.

[73] $100 million yacht after a $100 ,000 wine spree.

[74] Yeah.

[75] I mean, this is like $100 ,000 since Chom changed for this guy at this point in his career.

[76] And it's this scene that kind of really illustrates just how Shue and his company rode this tremendous property boom in China, unlike any that the world had ever seen.

[77] And he was at the center of it.

[78] And by 2018, Shu is China's richest man. But the problem is the property boom becomes based more on speculation than true demand.

[79] What do you mean?

[80] At some point, in the past decade, basically, the government loses control.

[81] And it's Evergrand and other developers who are actually fueling the speculative activity in the property market.

[82] And for a while, it didn't matter because everyone was benefiting.

[83] So you had local governments who were selling land to developers who were benefiting.

[84] You had investors who kept lending to companies like Evergrand who were benefiting.

[85] And you had households who really had very few other options for where to put their savings, putting it into property.

[86] And they were benefiting because prices kept going up and up and up.

[87] But all that speculative activity led to more apartments in China than there are people who could possibly live in them.

[88] And it also created some of the most unaffordable property in the world.

[89] 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.

[90] So it's hard for them to see how things are.

[91] getting better.

[92] 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.

[93] So the problems that Evergrand is leading a speculative housing bubble, and that is leading to social inequality.

[94] Exactly.

[95] And the problem for Evergrand was that in participating in this housing bubble, It had borrowed an unbelievably large amount of money, $300 billion.

[96] Wow.

[97] Making it the most indebted real estate developer in the world.

[98] But then August 2020 happens, and the central bank goes, enough is enough.

[99] And basically cuts off lending to developers like Evergrand and forces them to start addressing their debt.

[100] and start paying it off.

[101] So at this point, Evergrand is running out of options for ways to find cash.

[102] The banks are no longer lending to it.

[103] And so there's really nowhere for Evergrand to turn and a lot of people, a long line of people outside their door, asking for money and asking for it now.

[104] So this is starting to look like a company that's on the verge of financial collapse.

[105] Yes.

[106] And how does the world come to understand that?

[107] Well, it's actually not until this summer.

[108] In August, when authorities summon Evergrand in for this meeting and then they issue a statement afterwards, and it's short and terse, but it hints at how Beijing sees Evergrand, that it's kind of this corporate baddoer, and that it might be made an example of.

[109] And so that's when the panic really starts to begin.

[110] And suddenly people start worrying and the rumor starts that Evergrand is actually on the verge of bankruptcy.

[111] And that's when we start reaching out to people whose lives have been affected and in some cases destroyed by Evergrand.

[112] We'll be right back.

[113] So, Alex, tell us about these people that you met whose lives have been upended by the problems inside Evergrand.

[114] So in August, we start trying to find as many people as we can who we think may have been affected by Evergrant's crisis.

[115] And so we start with homebuyers.

[116] And we find this guy named Wesley Jong.

[117] He's 33 years old.

[118] And he tells us that four years ago, he bought an apartment that hadn't been completed yet.

[119] And at the time, he puts down $138 ,000, which is basically the life savings of his parents and some of his own savings.

[120] And then he starts making monthly mortgage payments on top of that.

[121] And at this point, he's made more than 40 monthly payments.

[122] And it's four years later.

[123] and he still hasn't seen the apartment.

[124] It's not finished.

[125] Wow.

[126] And so what we learn in our reporting is that this guy, Wesley Jong, is actually just one of some 1 .6 million people who just like him put money down for an apartment that Evergrand, because of its problems, has not been able to finish.

[127] So there are now a lot of people who have poured their life savings into homes and into the dream that Ever Grant has.

[128] created of a middle -class existence, and they've gotten nothing in return.

[129] Yeah, it's a lot of angry homebuyers, and we start talking to other people who are affected by Evergrand, and we come across this contractor named Yong Zhuchang, who's from a city in central China, and he and his workers finish their job with Evergrand in May, but he tells us that he hasn't been paid since February.

[130] And at this point, Evergrand owes him half a million dollars.

[131] Wow.

[132] And it's not just him because he's hired a bunch of workers to help him with a job.

[133] And at this point, he's worried that his whole business is basically going to collapse.

[134] And so that's the story of home buyers and contractors who are affected by Evergrand.

[135] But what really surprised us at this point in our reporting was that employees also were deeply affected by Evergrand's troubles.

[136] So we come across this guy named Jin Chung, who's 28, and he works for Evergrand in the eastern city of Hefei.

[137] And he tells us, in April of this year, his bosses basically said, you need to stump up a certain amount of money.

[138] For him, it was $62 ,000 and invest it in this high interest investment product, but give us the money.

[139] So it's basically like a short -term high -interest loan.

[140] And we later learned that 70 to 80 % of Evergrand employees across the country were told that they needed to hand over some amount of money as a loan.

[141] And that, And that if they didn't come up with that money, that their bonus would be docked.

[142] So it was sort of strong -armed, right?

[143] And Jin Chung, the employee we spoke to, told us that he didn't feel like he had an option.

[144] So Evergrand is forcing its employees to bail out their employer because it has so recklessly been borrowing and has run out of money.

[145] That's right.

[146] And many employees said they borrowed from parents.

[147] in -laws.

[148] Some said they put in hundreds of thousands of dollars.

[149] And some of these high -interest loans that were packaged as investment products, they were meant to be paid in September.

[150] And so everything's starting to come to a head.

[151] Evergrand has been chastised by the government.

[152] Rumors of its bankruptcy are spreading on the internet.

[153] And at the same time, they're telling employees who are expecting their money back, plus an interest, that they have to wait.

[154] And so that's when employees start panicking, and that's when they start joining others, homebuyers and contractors, suppliers, in actually protesting.

[155] Like actual protesting on the streets?

[156] Yeah, which is unusual for China.

[157] We're talking groups of 50 or 100.

[158] 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 Evergrand's headquarters in Shenzhen.

[159] And it's super chaotic.

[160] And outside, you just see these police.

[161] with these giant riot shields, and it disappears as quickly as a protest started.

[162] And then all we see after for days later are the police officers with their riot shields outside the headquarters of Evergram.

[163] So this is more than just a company imploding at this point, if you're the Chinese government.

[164] This has all the makings of potentially social unrest, something that is very, very unusual in China.

[165] Yeah.

[166] But just as quickly, as we see these protests, they're silenced as they always are.

[167] And some protesters later tell us that they're contacted by the police and intimidated.

[168] And at this point, Evergrand is really starting to run out of money and out of time.

[169] And this is sort of mid -September.

[170] It hasn't been able to raise money by selling off parts of its business.

[171] It's also run out of other ways to find money, like tapping employees.

[172] And probably more important than anything else, no one is buying any of its apartments.

[173] And that's when things get really bad, because Evergrand is days away from this deadline for a really important interest payment that it owes to foreign investors.

[174] And that day comes...

[175] There was no sign that Ealing Chinese developer Evergrand paid $83 million.

[176] in interest payments, it owed offshore bondholders.

[177] And Evergrand doesn't make the payment.

[178] The Thursday deadline for the payment came and went with complete silence from the firm.

[179] So at this point now, Evergrand is at risk of defaulting, and the whole world is now watching.

[180] And you start to see headlines raising the question.

[181] With liabilities of $305 billion, Evergrand has sparked concerns of a messy collapse.

[182] if Evergrand defaults on its debt.

[183] It could spread through China's financial system and reverberate around the world.

[184] Is this going to lead to some kind of financial crisis in China?

[185] So Alex, explain that.

[186] How could the collapse of Evergrand produce a larger financial crisis in China?

[187] How would that work?

[188] Well, consider this scenario.

[189] So Evergrand disappears.

[190] and that spills over into the broader housing market and you start to see properties lose value.

[191] Then you see new property prices start to plummet.

[192] Then homes start to become worth less than the mortgages that people are paying on them.

[193] And then there are all the companies and the banks and the financial institutions that Evergrand owes money to and they start to find themselves in trouble.

[194] And then finally, panic starts to set in, doubts grow about all these other companies like Evergrand that have so much debt that maybe they can't go on either.

[195] And so that's the thing about financial panic.

[196] It's all about fear and emotion.

[197] And those are things that are really hard to contain.

[198] Right.

[199] So the problem is if Evergrand goes under, lots of people get hurt, which is part of the financial crisis.

[200] But the part of a financial crisis that would be hard to predict would be the fear that there are lots of little evergrans dotted around the Chinese economy.

[201] And if that fear starts to grow, that's what a financial crisis would look like.

[202] People might pull their money out of those companies.

[203] Investors might demand their money back.

[204] And all of a sudden, the entire Chinese economy is on the brink of some sort of collapse.

[205] Yeah.

[206] 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.

[207] So I have to imagine that China has some kind of a plan to help Evergrand get through this and avoid that nightmare scenario you just outlined, Alex.

[208] And so are they gearing up the Chinese government to essentially bail out Evergrand?

[209] That's the thing, not necessarily.

[210] We don't actually know what the government is going to do.

[211] There's actually a very good chance that China will let Evergrand fail.

[212] So why would that be?

[213] Why would China not bail out Evergrand?

[214] Because China thinks that I can actually avoid that nightmare scenario.

[215] I think the Communist Party believes it has the power to eventually pay the contractors and make sure that all the suppliers that Evergrand owes money, to, well, in some way, get some of the money they're owed, that the home buyers who are waiting on apartments, that those apartments ultimately get built by someone.

[216] Because the last thing that the Communist Party is willing to sacrifice is political instability.

[217] 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.

[218] What they fear is that in bailing out Evergrand, 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.

[219] And in this scenario, China's property market just keeps getting bigger and bigger, and prices go up and up.

[220] And that gap that already exists between the rich and poor just gets bigger.

[221] And that is just not good for China, because at this point in their trajectory, they want to create economic growth that the wider population can participate in.

[222] And so letting Evergrand fail, potentially, you're saying, puts China on a better, healthier, more sustainable, fair, more equal economic path that is in line with what the Chinese Communist Party says are its values.

[223] And so China can live with the potential short, short -term pain of an Evergrand collapse because what it gets in return is just a better long -term China.

[224] Yeah, but by letting Evergrand fail, maybe China can start to move its economy away from this speculative model of borrowing and borrowing that has created these huge bubbles.

[225] 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 Evergrand and its founder have really come to embody.

[226] Does this in some ways mean that that economic experiment has failed?

[227] 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.

[228] I think the better way to look at it is that this moment is a test for just how socialist China is.

[229] 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.

[230] This change that needs to happen and 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.

[231] Hmm, because what happened with Evergrand was not adhering to that socialist vision.

[232] I mean, I think if you look at Chu at the height of his success, there was an incredible amount of excess.

[233] 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.

[234] What's also happening in the back, backdrop here at the moment is China's leader Xi Jinping.

[235] He's talking a lot about this idea of common prosperity.

[236] And it's not new.

[237] It's something that Mao talked about and every Chinese leader has talked about.

[238] But it could actually mean something right now.

[239] Because if China let's ever again 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.

[240] Well, Alex, we appreciate your time.

[241] Thank you very much.

[242] Thanks so much.

[243] On Friday, Evergrand narrowly avoided defaulting on its debt by making an overdue financial payment at the last possible moment.

[244] But in a securities filing, the company acknowledged, the severity of its financial troubles, writing, quote, there is no guarantee that the company will be able to meet its financial obligations.

[245] We'll be right back.

[246] Here's what else you need to another day.

[247] I think we're pretty much there now.

[248] You think you have a deal now?

[249] We're almost there.

[250] It's just the language of it.

[251] 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.

[252] 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.

[253] 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 $1 ,000.

[254] $2 trillion at the urging of two moderate senators, Joe Manchin and Kirsten Cinema.

[255] 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.

[256] Today's episode was produced by Luke Fanderplug, Stella Tan, and Alexander Lee Young.

[257] It was edited by Lisa Chow and Mark George and engineered by Chris Wood.

[258] Special thanks to Joy Dong.

[259] Our theme music is by Jim Brunberg and Ben Landsberg of Wonderly.

[260] That's it for the daily.

[261] I'm Michael Will Barrow.

[262] See you tomorrow.