What happened
Evergrande Group shares plummeted by 20 percent on Monday, reaching a record low, according to the BBC.
A statement issued over the weekend by the property giant states: “In light of the current liquidity status of the group, there is no guarantee that the group will have sufficient funds to continue to perform its financial obligations. The company received a demand to perform its obligations under guarantee in the amount of approximately 260 million. In the event that the group is unable to meet its guarantee obligations or certain other financial obligations, it may lead to creditors demanding the acceleration of repayment.”
The announcement triggered a rapid and coordinated response from various Chinese authorities, including the People's Bank of China, the country's Banking and Insurance Regulatory Commission, and China’s Securities Regulatory Commission, as per Markets Insider.
Guangdong province's government also dispatched a working group to Evergrande. The move was made to “resolve risks, protect the interests of all parties, and maintain social stability,” according to a statement from the provincial government.
The Jing Take
Without a government bailout, cash-strapped Evergrande’s economic prospects seem morose. Moreover, the group's collapse could seriously dent China's debt-ridden housing market while bringing down adjacent sectors.
This outcome will impact real estate speculators, but it will also hurt young, middle-class investors and middle-market consumers who have been active in the luxury market. Close to 80,000 Chinese investors had bought Evergrande’s wealth management products (WMPs), but it is highly doubtful they will cash out.
As mentioned previously, the Evergrande fallout could shake up the luxury industry. As consumers lose their homes and get buried in debt, they will be forced to abandon “conspicuous consumption” and focus exclusively on necessities. And even those who don't get directly impacted by the real estate bubble might choose to hide their wealth and status to avoid scrutiny.
Xi Jinping’s “common prosperity” goal has already been sending shock waves through the upper class. Therefore, an additional crisis could precipitate societal changes, pushing the rich to hide their assets and status.
Obviously, a government bailout could save Evergrande. But that doesn’t mean smaller property developers would also get rescued. A change is already underway, and luxury brands need to prepare for a reality where “silent luxury” is trending over “bling.”
The Jing Take reports on a piece of the leading news and presents our editorial team’s analysis of the key implications for the luxury industry. In the recurring column, we analyze everything from product drops and mergers to heated debate sprouting on Chinese social media.