Bad debt in construction sector will hit Chinese economy, warn analysts

Beijing: Evergrande, China’s leading construction company, has reportedly failed to repay more than 300 billion in debt. It has been revealed that two leading multinational banks have since refused to accept the bonds issued by Fantasia company as collateral. Subsequent developments have brought the issue of bad debts in the Chinese construction sector on the anvil. Analysts claim that this has created an atmosphere of concern among investors, including the banking sector.


Bad debt in construction sector will hit Chinese economy, warn analystsEarlier this year, the International Monetary Fund warned that the Chinese debt burden was rising sharply, and the credibility of the private sector was also declining. However, the Chinese regime has not taken any steps to reduce the debt burden and its risks. According to a report, non-performing loans (NPLs) from Chinese companies have increased in the first four months of 2021 alone. According to Bloomberg, Chinese companies have not repaid a whopping USD 18 billion in debt in the first four months. This is an increase of about 70% over last year.

Among the non-performing companies are a large number of construction companies. According to China’s top five banks, USD 15 billion in loans to real estate and construction companies have gone bad in the first six months alone. Compared to last year, NPAs have increased by 30% this year. More than 200 builders have lost their jobs in the previous seven months due to the rising debt burden, according to the government magazine People’s Court Daily.

Bad debt in construction sector will hit Chinese economy, warn analystsOver the past few weeks, Evergrande, a leading Chinese property and construction company, has been in constant trouble. Foreign financial institutions have downgraded the company, and banks in China have also been reluctant to lend to the company. The company has USD 305 billion in debt and is claimed to be unable to repay it. Shares of the company have fallen more than 75% over the year. The company has also been banned from selling bonds.

In the last few months, China’s ruling communist regime has been trying to tighten its grip on private industry. For this, new strict rules have been implemented, and banks have been banned from arbitrarily disbursing loans. At the same time, the companies in the construction sector have been divided into different phases and criteria have been set as available funds, value and debt burden. Therefore, it is feared that more Chinese construction companies may go bankrupt shortly.

Along with the manufacturing sector, the construction sector is also a significant component of China’s economy. Therefore, economists have warned that the impact on the industry will reflect in the banking, stock market and investment sectors. The past few months have been a major setback for China’s private sector. At the same time, the new wave of Coronavirus has also signalled a decline in many areas. The addition of the construction sector and bad debts could hit China’s economy harder.

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