China Evergrande Group, a debt-beleaguered property developer, said in a September 28 statement to the Hong Kong Stock Exchange, where it is listed, that the company's Chairman and Executive Director Xu Jiayin, also known as Hui Ka Yan, has been subjected to mandatory measures due to suspicion of criminal activity. Xu's coming under investigation has created added trouble for the real estate giant.

Evergrande began as a property development firm before extending its business scope to include finance, tourism and sports. In 2021, it ranked 122nd on the Fortune Global 500 list. Today, it is struggling with 2.4 trillion yuan ($329 billion) in liabilities, accounting for roughly 2 percent of China's GDP in 2022. Concerns have emerged that the debt-ridden firm might destabilize China's financial market.

These concerns are justified. It is still fresh in people's memory that the collapse of U.S. financial giant Lehman Brothers triggered a global financial crisis in 2008. Both have deep roots in the real estate and financial sectors.

Evergrande's trouble began in August 2021, when the company acknowledged in its 2021 interim report that some payables related to property development were overdue, leading to the suspension of work on some projects. Exposure of a string of other liabilities-related issues ensued. On August 17, 2023, the company filed for bankruptcy protection in a U.S. court in a bid to shield itself from creditors that might sue it or seize its assets in the United States.

However, there is little cause to envision an Evergrande-sparked financial crisis similar to the one following the collapse of Lehman Brothers in 2008. The former's implosion would be unlikely to produce comparable shockwaves in the Chinese market partly owing to the wide distribution of its debts.

Evergrande's non-performing debts make up a small fraction of Chinese banks' financial assets and are distributed across many banks. Financial liabilities account for less than one third of its debts, which are also distributed among many creditors. Thus, no individual Chinese financial institution is exposed to large financial risks. Even if it has to default on its more than 200 billion yuan ($27.4 billion) in debts owed to the more than 100 Chinese banks, this sum is still not big enough to trigger systemic risks in China's banking industry.

What Evergrande suffers is more of a liquidity crisis, which has resulted from liquidity shortages in the property industry. Real estate development accounts for roughly 60 percent of its overall assets. Recent years have seen the conglomerate stretching its business by making big investments in diverse sectors, leading to deteriorating operations and financial distress.

Its current financial trouble is hurting homebuyers much more than banks and therefore authorities have urged those in charge at Evergrande to make sure that undelivered apartments will be finally delivered. In some cases, financially healthy real estate developers have taken over its property projects.

Evergrande's debt crisis is unlikely to affect the overall health of China's property market. Several years of effective macro control policies have stabilized the real estate industry, with most property firms operating in good financial conditions.

The Chinese Government moves quickly. It has adopted a set of measures to tackle the financial distress facing Evergrande, including a demand for rational fund operations and the strengthening of financial supervision. These measures, which underline the need to balance property development and financial stability, are likely to help curb the spread of risks and prevent drastic fluctuations in the financial market. 

Copyedited by G.P. Wilson

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