Here’s What the Evergrande Crisis Means for Global Investors

China is pushing investors out of real estate and software companies and into sectors it believes are more valuable in the country’s rivalry with the U.S., according to Clocktower Group.

Qilan Shen/Bloomberg

Qilan Shen/Bloomberg

China’s embattled real estate developer Evergrande is facing a default crisis, but one strategist argues that the meltdown may ultimately introduce global investors to better opportunities in the world’s second-largest economy.

With over $300 billion liabilities on its balance sheet, Evergrande is the world’s most indebted real estate company. On Thursday, it missed a $83.5 million dollar bond interest payment, leaving investors in limbo.

Marko Papic, partner and chief strategist at Clocktower Group, said the Evergrande crisis is a loud signal that the Chinese government is determined to redirect investments from the real estate industry to more sophisticated and capital-efficient industry sectors like hard technology. Among other things, hard tech includes artificial intelligence, optoelectronic chips, and biotechnology.

The alternative asset management firm provides institutional investors with insights into China’s investment landscape and helps them find onshore asset managers. It has been closely following the Evergrande crisis from last year and documented China’s regulatory moves in its bi-monthly research product called “China Macro Watch.”

Chinese policymakers have been trying to better regulate the property market since 2017, Papic said. The regulations culminated with the implementation of the “three red lines” in 2020, which imposed a series of caps on the amount of leverage real estate developers can use.


“Evergrande is obviously the most exposed and is now being hurt by this regulatory push,” Papic said.

But the sharp scrutiny by the Chinese authorities doesn’t mean the country is suppressing the growth of capitalism, a common view by foreign investors in particular. Rather, it is part of a series of macroprudential regulatory reforms aiming to “stem the flow of capital into unproductive investments,” according to Papic.

The recent crackdown on the technology sector serves the same goal, he added.

“Many investors process that as China is destroying innovation,” Papic said. “But it has nothing to do with China being ‘evil,’” Instead, Papic thinks the Chinese government is directing capital flows into other areas that can make it stand out in the rivalry with the U.S.

“Being able to deliver a hamburger to your door at 3 a.m. is not that significant in a geopolitical competition,” Papic said, referring to an antitrust probe into food delivery giant Meituan in April.

Hard tech innovations are what investors should focus on next, Papic said.

Wei Liu, partner at Clocktower, added that China’s regulatory reforms are driven by both external and internal, domestic factors. The recent ones on Evergrande and software technologies fall into the latter category as the country shifts its development focus to hard technologies.

“For institutional investors searching for alpha [in China], the key is to find the right market where there is liquidity and inefficiency,” Liu concluded.