Evergrande, China’s second-largest real estate developer, is at the risk of bankruptcy. Chinese authorities have announced to the public that the company will not be able to pay its interest rates until its next due date. This left citizens fearful for their future as it could affect people’s housing conditions.
Evergrande is strapped for cash
The Ministry of Housing and Urban and Rural Development has informed Chinese banks that Evergrande will not pay its interest by the agreed date September 20. So far, this is the clearest sign that the company is in financial difficulty and may even collapse.
Evergrande has a debt of over $ 300 billion, a monumental figure. Given the size of the company and the fact that it is an important component of the housing industry, Chinese authorities have chosen to help through a restructuring of payments. There is also the word that they can save them entirely from their obligations.
While the news of a large company likely to fall to its knees is great news, what makes this development so disturbing is the kind of ripple effect it will have across China. For starters, 1.5 million people can lose any down payment they have placed on a property, potentially leaving them homeless.
There are also a significant number of small businesses that have worked for Evergrande but were not paid for their services. Moreover, the workers of Evergrande would not be paid either. From 2020, the company would have employed 123,276 people.
It is not exclusively a financial question; it also has humanitarian implications. It could impact people’s lives in a number of ways. Homelessness and unemployment could increase, as well as the collapse of small businesses and there could be a ripple effect for investment firms. In essence, it could harm China’s economy and social cohesion. #
The protests have arisen
This has parallels with the infamous subprime mortgage crisis that occurred in the West more than ten years ago. If Evergrande’s problems evolve into something similar, it could trigger a recession, just like how the subprime issues did it in 2007.
This is not the only problem China faces economically. In early August, the country lost $ 740 billion in shares due to policy changes regarding its EdTech industry. This once very lucrative estate has been damaged by the Chinese Central Committee banning foreign investment and preventing educational companies from listing on the stock exchange.
Considering how, just four months ago, the Chinese economy experienced its first shrinkage in the past 40 years, Evergrande could be the catalyst for a horrific downward spiral. The citizens of the country seem to be well aware of this.
People started to demonstrate in front of the Evergrande headquarters, demanding payment. The protesters are made up of former employees, contractors awaiting payment, investors, potential owners and even people who have no direct affiliation with Evergrande, but who nonetheless understand the gravity of the situation.
If Evergrande collapses completely, the Chinese government has essentially two options: it can either reimburse each individual who has been affected by the impression of more money, or ignore the struggles of the people. Both options would have repercussions on the economy.
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Examine China’s options
Paying back lost funds is probably the most ethical response the government can have. It is a generally accepted principle which states have a duty of care to their citizens, because it’s part of a government social contract.
In simplistic terms, a social contract is an implicit relationship that a governing body has with the society it governs. People act responsibly and, in return, they expect to be protected and supported by those in power.
If China does not take care of its people, then they are likely to revolt, because the state will have broken its social contract. Considering how citizens have already taken to the streets, this could very quickly escalate into something bigger.
However, printing money to reimburse people could do more harm than good. The US Federal Reserve attempted to do something similar as a way to stimulate the economy during Covid-19, which sparked a constant backlash from institutional figures.
In other words, the Chinese government is stuck in a trap – it can either help its people and possibly hurt their economy, or leave them to fend for themselves in the hope of preventing inflation from rising, as they do. sees it in the US and UK. . Expect a response from Chinese authorities in the coming weeks.
What do you think China should do to try to rectify the situation? Let us know in the comments below.
About the Author
Kai Morris is a crypto and DeFi specialist and researcher. He holds an Honors BA in Law and Philosophy from the University of Essex, where he studied complex economic, legal and ethical theories relevant to the FinTech landscape. Kai is particularly interested in decentralization and privacy blockchains, as they are directly linked to our human rights and our development. He cares about blockchain, DAG and DeFi as a way to positively change our lived experiences. Kai is an investor in Ethereum and Monero.