The Chinese Real Estate Development Model

Evergrande development company is stopping paying back its debt, and the world is anxiously expecting the consequences. It has 300 billion in outstanding debt and it was being financed by sales of unbuilt apartments.  The model is something similar to a Ponzi scheme, which works wonderfully till it does not. Earlier this month, the government barred private equity funds from investing in real estate, cutting off a major source of funding for builders.

The company’s electric vehicle business, China Evergrande New Energy Vehicle Group, also lost the equivalent of $741 million. The EV company’s valuation was estimated as high as $80 billion earlier this year and now sits at around $6.5 billion. The personal fortune of the worried man in the pic stood at 10 billion, before the debacle. 

What we learn? That economic management in China makes mistakes. What will happen now? The building sector will be re-organized and raw materials sales to China will fall. Evergrande owes money to Chinese financial organizations which will be badly hurt. The coming events may depress the Chinese and open opportunities to American financial firms.