Real estate developers in China are set to become financially unsustainable after the collapse of Evergrande, says the managing principal of macroeconomic research company Macrolens, Brian McCarthy.
Evergrande, which was once China’s largest property developer, holds hundreds of billions of dollars in debt and was delisted from the Hong Kong stock market earlier this week.
According to McCarthy, all the “large names” in China’s property development sector are “going to become zombies basically” after the fall of Evergrande unless authorities liquidate the assets of troubled developers to pay debts.
“Unless the policy makers onshore agree to liquidate these companies, sell the assets for what they can get, give that to the creditors and tell them, ‘That’s all you get, mark the rest down’… The system will have to carry the bad debts. And this has been the Chinese story for the last couple of decades.
This is why the economy is in debt deflation, because these debts never get resolved. And by the way, we could talk about the anti-involution campaign [An initiative by the state aimed at curbing excessive internal competition by targeting excessive price wars and industrial overcapacity]. It’s going to be the same story. If you don’t write down the debt, you’re not addressing the problem.”
Macro guru Luke Gromen earlier this month said that China can absorb defaults since the banks and the debtors are under the control of the state. According to Gromen, the Chinese government prints the money to pay off the debt, leading to the yuan weakening. Capital controls would, however, prevent a significant flight from the yuan.
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