What will happen in China after the Evergrande flop?
Evergrande, the most leveraged real estate company in the world, has filed for debt restructuring in the United States. It is not unexpected news, but its crisis can still represent a problem for a China already in difficulty. Here are facts and comments
The large Chinese real estate development company Evergrande filed for bankruptcy in the United States and resorted to a law – Chapter 15 – which protects it from foreclosure in exchange for the launch of a recovery plan and the repayment of creditors. The company subsequently made it clear that the request does not concern the bankruptcy but constitutes a procedure for the restructuring of the foreign debt.
Evergrande is the most leveraged real estate developer in the world, with debts of approximately $340 billion. Between 2021 and 2022 it reported losses of 81 billion. It has already defaulted on its dollar-denominated debt in 2021 and is now estimated to have international liabilities of $19 billion.
WHY EVERGRANDE'S FAILURE IS A PROBLEM FOR CHINA
Evergrande's crisis has already been compared – but this is an exaggeration – to that of Lehman Brothers, the US bank that went bankrupt in 2008 due to its inability to service its debts, whose bankruptcy contributed to the global economic crisis known as " Great Recession".
Despite the forced juxtaposition, the bankruptcy of the company could still have serious consequences in China, whose economy is in trouble amid deflation, a drop in exports and a rise in youth unemployment: precisely the real estate market – of which Evergrande is, or was, the highest representative – it drives more than a quarter of economic activity, wrote the Financial Times .
EYES ON COUNTRY GARDEN…
Evergrande's crisis could have repercussions both on other companies in the sector and on other segments of the Chinese economy. Eyes are particularly on Country Garden , another property developer, which is facing insolvency after missing payments on international debts this month.
In July, new home prices in China fell for the first time in 2023. According to the consulting firm SinoInsider, the country's debt problems are likely to worsen as "recessionary and deflationary pressures build up, [and, ed . ] Chinese companies are struggling to make profits”.
The AFP agency pointed out that at the end of 2022 Country Garden had a debt of 157 billion dollars (but it could also be higher than that) and liquidity of 20.2 billion. It missed two bond payments last week and faces default as new payments are expected in September. In 2024, then, according to Moody's calculations, bonds for 4.2 billion dollars will expire.
… AND ABOUT ZHONGRONG
As for the possibility of widespread contagion, concerns are raised by the investment company Zhongrong, which is very active in the real estate market, which has not repaid the savings products. Zhongrong had sued Evergrande in May 2022 for a $260 million investment.
China's so-called "shadow banking sector", of which Zhongrong is a prominent representative, is heavily exposed to the real estate market. According to Moody's, the increase in defaults by developers has pushed the ratio of non-performing loans of Chinese banks to 4.4 percent (in 2020 it was 1.9 percent).
WHAT SHOULD WE EXPECT?
Given the billion-dollar debts that Evergrande has accumulated towards banks, private institutions and public entities, its bankruptcy could trigger a series of other bankruptcies: "Dozens of Chinese developers have defaulted on their debts after the collapse of Evergrande" of 2021, wrote the Financial Times . “Since the industry debt crisis unfolded in mid-2021,” Reuters added, “companies accounting for 40 percent of home sales in China have defaulted, most of which are private real estate developers. ”. In China, however, property buyers usually pay the full amount up front, before the building has been built.
According to Reuters , Country Garden's crisis has so far not caused the market the same shock Evergrande did because many private real estate development companies have already defaulted. Evergrande, moreover, was already insolvent at the time of the default, while at the moment Country Garden has more assets than liabilities. However, the situation of Country Garden is worsening in a moment of great difficulty – greater than in 2021 – both for the Chinese real estate market and for the entire economy of the country.
It is not clear if and how the Chinese central government will intervene, which to date has not announced particularly significant stimulus measures for the sector.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/mondo/evergrande-cina/ on Fri, 18 Aug 2023 11:34:04 +0000.