One of China’s largest real estate development companies, Evergrande, found itself in a financial crisis when it missed its deadline to pay interest to international investors in September 2021.
This sparked a panic in the world of global investing, as is usually the case. Evergrande’s missed deadline revealed its debts, estimated at more than $300 billion. This makes Evergrande the most indebted real estate company in the world.
Why is this important? When a company as large as Evergrande faces such large losses, it indicates that there are more problems on the horizon.
One of the main indicators of the economic crisis of 2008 was the collapse of the US housing market in 2007. This created a ripple effect on the global economy. The collapse was caused by insufficient regulations, low interest rates and easy credit. The impending economic crisis in China can be traced to deeper structural and political issues.
The problems facing Evergrande have exposed more real estate development companies and their debts. Some analysts even wondered if Evergrande was the next Lehman Brothers. The difference between the two is that government interventions were taken in order to stem the liabilities of real estate development debt.
These liabilities point to a greater financial crisis on the horizon if the measures implemented by the government do not solve the problem.
China has vast foreign direct investment, including in many African countries, worth billions of dollars. China is the world’s second largest economy and South Africa’s largest trading partner. If China faces an economic crisis, it will only be a matter of time before it spills over and puts additional pressure on an already weakened South African economy.
South Africa has designated areas called Special Economic Zones (SEZs) for targeted economic activities. One such SEZ is Musina Makhado in Limpopo. These zones aim to create more than 53,000 jobs, including through a designated coal-fired power plant for Musina Makhado.
However, in November 2021, two months after the announcement of Evergrande’s default, China announced that it would no longer fund new coal-fired power plants overseas. This includes the plant destined for the Musina Makhado SEZ.
While some opposed the development of a new coal-fired power plant for environmental reasons, the fact remains that these planned jobs will not be created from now on.
Renaissance Capital says South Africa – as a developing country and a close trading partner of China – is one of the African countries vulnerable to China’s debt problems. Indeed, South Africa exports large quantities of metals and minerals, including gold, platinum and coal.
So far, SEZs such as Musina Makhado have not yielded the expected results, including the creation of tens of thousands of jobs.
Besides the immediate economic instability caused by Russia’s invasion of Ukraine, another financial crisis builds up after Evergrande fails to repay his interest. Once other Chinese companies start to default – as they are expected to do this year – the effects will be felt around the world.
It’s hard to predict precisely where this will leave South Africans who are already struggling with rising fuel prices and other prices, but it looks likely that things are about to get worse. BM/DM