How Evergrande Defaulted: Positive Feedback Mechanism Subject to the Debt-Fueled Model in Chinese Real Estate Market
Taking Qaidam Basin as an Example
- https://doi.org/10.2991/aebmr.k.220502.075How to use a DOI?
- positive feedback mechanism; debt default in real-estate market; debt-fueled business model
Evergrande is selected as the research object to analyze the rationale of the default of Chinese real estate enterprises in 2021. This paper fills the research gap of the mechanism triggering default of real estate enterprises by interpreting the drawback of their debt-fueled business model and positive feedback phenomenon in the real estate market. The positive feedback is a self-reinforcing process of increasing returns which amplifies the effect of certain factors in the same direction and yields the accumulative causation. The business model under different market circumstances will engender virtuous or vicious positive feedback. When the housing market booms, there is the virtuous cumulative causation of high leverage ratio and high profit. In contrast, the vicious cycle of deleveraging and liquidity crisis will become self-reinforcing when the sales revenue is depressed or the credit is contracted, for the indebted firm had to sell the asset. The paper argues that due to the debt-fueled business model, Evergrande was fallen into the vicious positive feedback of deleveraging and liquidity crisis to repay the debt under the macro-control policy.
- © 2022 The Authors. Published by Atlantis Press International B.V.
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Cite this article
TY - CONF AU - Bochao Ma PY - 2022 DA - 2022/05/16 TI - How Evergrande Defaulted: Positive Feedback Mechanism Subject to the Debt-Fueled Model in Chinese Real Estate Market BT - Proceedings of the 2022 International Conference on Urban Planning and Regional Economy（UPRE 2022） PB - Atlantis Press SP - 424 EP - 429 SN - 2352-5428 UR - https://doi.org/10.2991/aebmr.k.220502.075 DO - https://doi.org/10.2991/aebmr.k.220502.075 ID - Ma2022 ER -