Amid a construction slowdown, China's economic growth weakens

STEVE INSKEEP, HOST:

This week, we find out if a giant Chinese real estate firm will default on its debt. Evergrande - it's already behind on payments and is supposed to pay up on Saturday. The company's debt is so huge that it raises questions about China's broader economy. And it comes at just a moment when the growth of that economy is slowing down. NPR Beijing correspondent Emily Feng is here. Hey there, Emily.

EMILY FENG, BYLINE: Hey, Steve.

INSKEEP: How did Evergrande get in such trouble?

FENG: It began with this quite banal policy called the three red lines, referring to rules enforced this summer that limit the debt ratios among the property sector. And Evergrande was the firm that was hardest hit. For years, Evergrande has raised eyebrows because it's accumulated just so much debt. Over the last few years, it's managed to pay off the interest until this year because of this new policy. And it's been hardest hit because it was at the forefront of this risky model where it climbed to the top by taking out huge loans, using that money to build and sell apartments before they even finished constructing these units and then using money from what they call presales to then buy even more land and build more houses. But under these three red lines rules, Evergrande just can't keep the cycle up. It's being forced to pay back debts, but it just doesn't have enough cash on hand.

INSKEEP: And this is making me think about ghost apartments, ghost buildings, ghost cities across China. There's been a lot of what seems to us like gross overbuilding across China. So it's not hard to imagine a real estate firm getting in trouble. But how much effect is this having on China's broader economy?

FENG: It is sending tremors already through the Chinese economy, and you can see those effects in today's third-quarter GDP figures. So today, China's Statistics Bureau revealed that China's economy grew 4.9% over the last three months compared to the same period last year. And on paper, this looks quite robust. But this is relative because last year, China's economy was still struggling from a COVID pandemic. So this year's GDP increase on paper is actually meaning that China's quarter-to-quarter growth has pretty much plateaued.

And the reason why it's slowing down comes down to two things. There's actually a power shortage right now, and factories are getting rationed power. So that's dragging down China's economy. And the second is concerns about Evergrande and the broader property sector. It's exactly this kind of vulnerability to debt and the reliance on construction to fuel growth that's forcing to - forcing Beijing to decrease its reliance on property firms like Evergrande. But the risk is that when Beijing moves away from debt and forcing firms to pay back its loans, that that could tip China into a recession if it's not managed carefully.

INSKEEP: You know, Emily, when you say 4.9% growth but it's actually flat, I just want to underline how different that is than the China you've known for years - 8%, 9%, 10% growth all the time.

FENG: Usually double-digit growth, exactly.

INSKEEP: And now it's kind of nothing for the moment. So what happens in this circumstance if Evergrande were to default?

FENG: The real concern is what analysts call financial contagion, which is the risk that Evergrande's insolvency then spreads to banks and other companies which Evergrande owes money to. The central bank has tried to downplay these risks by saying that Evergrande is, quote, "controllable." But reading between the lines, what Beijing is saying is that Evergrande could fail. The government may not step in this time to control its bankruptcy. But the financial system is highly centralized, so the state likely could minimize the damage. But Beijing is sending the message it's willing to let firms go bankrupt, which is a huge shift away from China - how China grew its economy with double-digit GDP figures for the last two decades.

INSKEEP: NPR's Emily Feng is in Beijing. Thanks so much.

FENG: Thanks, Steve. Transcript provided by NPR, Copyright NPR.