Chinese real estate developer Evergrande has been in the financial headlines for several months now, which has spawned many questions about the situation. Who is Evergrande? Is this a “2008 Lehman Moment” for China? Will the Chinese government bail them out? Will this affect American investors? However, the financial and economic press have not tackled a question that may be on the minds of many American developers, contractors, and suppliers: If Evergrande goes under, what will happen to our already stressed global supply chains?

For a bit of background: Evergrande has been described as a real estate developer, but in reality they are more of a massive conglomerate. Evergrande’s full portfolio includes a soccer team, a theme park, a grocery business, large electric vehicle investments, hotels, and malls. However, their real estate developments certainly make up the majority of their business. The company is known for being deeply in debt, having more than $300 billion (yes dollars, not yuan) in liabilities. These liabilities are the genesis of its recent debt servicing issues.

Evergrande has been on the verge of missing several bond payments to investors. Evergrande somewhat surprised the world by avoiding default when they made an interest payment on Friday, October 29. However, they had previously missed payments on September 23 and 29, and October 11. It is unclear if Evergrande is righting the ship or simply bailing water with a teacup. Many are speculating that the Chinese Communist Party government (“CCP”) will bail them out or facilitate a deal between Evergrande and other CCP-owned banks or companies.

It would not be unprecedented for China to bail out one of their state owned enterprises. Earlier this year, the CCP set up a capital injection for China Huarong Asset Management, a CCP-owned investment bank. Huarong had taken on too many risky assets and was having cash-flow difficulties. The injection came through other CCP-owned financial entities. Now however, many China watchers are saying that the CCP may be content to let Evergrande sink, while protecting Evergrande’s suppliers, customers, investors, and other customers. This is because the CCP, under the leadership of Chairman Xi, has recently decided that many of their largest companies have too much debt, particularly in the real estate sector to discourage speculation.

While the CCP has taken steps to inject some liquidity into the market over recent weeks, China watchers have been somewhat shocked by the CCP’s silence on Evergrande’s issues. Additionally, some CCP insiders have stated that Evergrande is not too big to fail, and that its CEO should  bail out the company with his own billions.  If this change in CCP policy causes Evergrande to go under, could American companies suddenly find Chinese suppliers knocking, looking to replace their former Evergrande accounts?

In the long-term, the CCP’s policy of discouraging real estate development and speculation may result in Chinese suppliers (and their material suppliers in Australia and Asian countries) looking to the United States and Europe for customers.  This could ease some of the supply chain issues afflicting construction companies in Texas and around the world. However, given the size of Evergrande, if the CCP allows Evergrande to default on its debt obligations, the default could significantly worsen the current supply chain disruption and result in further cost inflation. A default by Evergrande would significantly strain the financial resources of unpaid material suppliers and manufacturers around the world, potentially bankrupting them and thereby placing more pressure on the supply chain.

The cascading effect of the financial and sovereign debt crisis of 2008 will likely resonate loudly in CCP’s decision of how to proceed.  At present, the CCP appears to be preparing to arrange for other CCP-owned developers and builders to buy up Evergrande’s projects. Such a move would ensure continuity of the projects, support individual homebuyers who have invested savings years in advance to purchase units in the projects, and create good political optics for the CCP.

Protecting your company against significant price and supply chain disruptions is essential in a volatile and ever-changing global economy.  The attorneys in our Austin and Dallas offices are available to answer your questions and assist in protecting your bottom line.

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