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Evergrande Group and China’s Debt Challenges (CRS)

2021-10-22 119

Evergrande Group and China’s Debt Challenges

 

 

 

 

 

October 21, 2021

Karen M. Sutter

 

 

Concerns about China’s high debt levels intensified in September 2021, when its second-largest property developer, Evergrande Group,failed to repay its debt obligations. The government of the People’s Republic of China (PRC or China) seeks to reduce debt and curtail market risks among firms like Evergrande, but defaults and a decline in property values could have broader effects. China’s property market accounts for almost 30% of GDP, a higher percentage than in most countries, and thus has complicated China’s efforts to reduce debt. Property is a main source of local government revenue and a key factor in corporate valuations and household net worth. This constrains policy options, despite China’s leader Xi Jinping’s statements that support reducing debt and inequality. Declining land revenue could affect local governments’ ability to repay loans and special bonds, which Nomura Holdings estimates reached almost $7 trillion (44% of China’s GDP) in 2020. China relies on debt-financed fixed asset investment (including property) and exports for growth. Supply disruptions, energy and commodity shortages, and industrial and property overcapacity are most likely exacerbating economic risks. The situation highlights potential broader and longer-term risks in China’s economy that Congress may consider as U.S. financial firms seek to expand their exposure to China.

 

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