Ghost cities haunt China - the Evergrande Crisis

Do you remember all those stories about ghost cities from ten years ago? Images like this:

Source: BBC

They were part of China's crazy building boom, where companies like Evergrande borrowed billions to create these cities, in the process creating construction jobs, as well as using steel, cement and other materials China was producing in vast quantities.

They believe there are enough empty apartments in China to house 90 million people - that's bigger than the population of Germany.

It created a lot of jobs - but it was all built with borrowed money. And if you build apartments that you can't rent or sell, eventually you go bust.

Evergrande owes a staggering $110 billion. There is a bond payment that is owed at the end of this month, and they haven't got the money to pay it. As as result their shares have crashed and people have been selling their bonds.

What happens if they can't pay? A Lehman brothers type collapse of the Chinese banking system would follow. (Western banks have limited exposure - HSBC appears to own $200 million worth of Evergrande bonds, which is a tiny amount of the $110 billion Evergrande debt).

Evergrande's creditors are mainly Chinese banks. They're under pressure from the Chinese government to roll over the debt, to prevent a crisis. In the meanwhile Evergrande will be liquidating what good assets it has, to try to repay some of the money it has borrowed.

Even if they manage to stave off a banking crash, no-one is going to lend more money for apartments to be built. So construction will be depressed, along with all the industries that supply construction. Millions of jobs will be at risk.

Even communist countries can't buck the laws of capitalism. I expect in future, they'll do tougher risk assessment before they lend, instead of simply caving to pressure from a local CCP politician to lend to create jobs.

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