Why Trouble at a Chinese Real-Estate Company Led to a U.S. Stock Market Plunge

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U.S. companies pinning their long-term growth strategies on doing more business in China may soon have to do a major rethink. KevinTDugan reports

A halted Evergrande real estate project in the Chinese city of Suzhou. Photo: Vivian Lin/AFP via Getty Images China was a very different place in June 2012, when activist short seller Andrew Left accused real-estate company China Evergrande Group of being “insolvent,” using “accounting shenanigans,” and paying outright bribes for land. For one, the current president, Xi Jinping, was waiting in the wings, still a few months away from succeeding Hu Jintao.

On Wall Street, some investors were quick to compare Evergrande to Lehman Brothers, the investment bank whose collapse marked the low point of the global financial crisis in 2008. But others were just as quick to knock down that comparison.

“All these things are — I wouldn’t say they’re all interrelated, but they are part of a narrative that they’ve gone too far too fast, and they need to take a step backwards,” the analyst said. “But it’s also hard to put the genie back in the bottle.” Last year, in the midst of the coronavirus pandemic, things started to change. The first cracks between the Chinese government and Evergrande emerged, with Xi’s government putting out a new policy of “three red lines,” a troika of rules that essentially pushed real-estate companies to become less indebted.

 

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KevinTDugan .KevinTDugan's report on why trouble at a Chinese real-estate company tanked the U.S. stock market was featured today in One Great Story, our reading recommendation newsletter. Sign up here to get it nightly:

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