Exploring Evergrande’s financial failures and why China’s government is stepping in

"Too big to fail" was a phrase used during the global financial crisis for large companies so over-extended that their collapse could cripple global finance. China is now trying to take a too-big company with too much debt, and manage its failure. The company is a real estate giant called "Evergrande". Nick Schifrin has more.

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  • Judy Woodruff:

    Too big to fail was a phrase used during the 2008 financial crisis for large companies so overextended that their collapse could cripple the global markets.

    Now China is trying to make a too-big company with too much debt that's already missed key payments and manage its failure. The company is a real estate giant called Evergrande.

    Nick Schifrin explains.

  • Nick Schifrin:

    The mission was occupy Evergrande. In a country where protest is often prohibited, earlier this month, Evergrande's investors filled the company's lobby to chant "Give us our money back."

    They direct their fury at an Evergrande manager. His solution is rejected, and he's dejected next to a woman who speaks for the crowd.

  • Woman (through translator):

    If they don't give me my money back, then I will jump off a tall building. They have cheated me out of all of my money. I have nothing left.

  • Nick Schifrin:

    Evergrande built itself and helped China build extraordinary growth thanks to tall buildings. This promotional clip shows Evergrande apartments for China's booming upper middle class.

    Evergrande became the country's largest real estate developer by building apartments across 8,000 sites, and pre-selling them before they were done. That means half-built apartments remain unfinished, even though people like Fan Wanting already paid.

  • Fan Wanting, Evergrande Investor (through translator):

    We definitely hope that the government will come out and give us an assurance. We still have to pay the mortgage.

  • Nick Schifrin:

    But it was Xi Jinping's government that looked at Evergrande and China's real estate giants and decided to cut them down to size. At one point, Evergrande's CEO reportedly rejected a $100 million yacht as too plain.

  • Michael Hirson, Eurasia Group:

    Evergrande is now basically the poster child for what Beijing is looking to do as it reins in the sector.

  • Nick Schifrin:

    Michael Hirson is the China practice head for the Eurasia Group and the former U.S. Treasury chief representative in Beijing.

    He says the $300 billion of debt amassed by Evergrande, whose headquarters towers over Shenzhen, China's Silicon Valley, was considered too risky.

  • Michael Hirson:

    China is now basically five years into what they're calling a financial de-risking campaign. And, essentially, it's a reflection of the fact that Xi Jinping and the Chinese leadership realized, if they don't get serious about debt risks, it could bring the whole system down.

  • Nick Schifrin:

    But in reining Evergrande in, the Communist Party faces risks, not only of more protests outside of Evergrande's headquarters that police tried to hide, but also contagion.

    Last week, Evergrande's troubles led to the Dow Jones' worst day in months. Experts say Evergrande is not a repeat of Lehman Brothers' 2008 collapse, when bankers left their jobs with only cardboard boxes and left the global financial system on the verge of collapse. But especially when it comes to real estate, what happens in China, doesn't stay in China.

  • Michael Hirson:

    In a worst-case scenario, what we would see is the fallout from Evergrande ripple through the sector, a fall in property prices, property sales, property demand that would really have a big impact on China's growth.

  • Nick Schifrin:

    And a ripple in China, of course, could mean a ripple globally, right?

  • Michael Hirson:

    If you think of the property sector in China as 25 to 30 percent of China's economy, well, then think as well of the fact that China has been generating about 30 percent of global growth in recent years. So, this is an engine for China's economy. And China is an engine for the global economy.

  • Nick Schifrin:

    Beijing assures the world, even if there's no bailout, Evergrande won't explode and its implosion can be controlled.

    Fu Linghui, Spokesperson, National Bureau of Statistics of China (through translator): Various regions and various government departments have adhered to the principle of housing for living in, not speculation, and stabilized housing prices. The overall situation has retained a stable trend.

  • Nick Schifrin:

    But China faces economic headwinds and now rolling blackouts. The lights are out in many shops and factories and could delay this year's holiday shipments.

    The cuts come from Beijing's reining in emissions from coal-fired plants to meet environmental targets. Beijing thinks cleaning up notorious pollution is popular and helps long-term stability. But that requires short-term pain. And whether it's electricity or housing, the risk is, the Communist Party will fail to deliver the immediate prosperity it believes creates stability.

  • Michael Hirson:

    You have got President Xi striking this theme of common prosperity, which means equitable gains for households, the party is going to take care of you, it's going to ensure quality of life.

    And, obviously, having households now purchasing apartments that don't get delivered looks worse than ever.

  • Nick Schifrin:

    Beijing is trying to reform and reduce risk without sparking crises. Whether it can succeed could determine the country's economic future.

    For the "PBS NewsHour," I'm Nick Schifrin.

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