In recent days, the financial market has been apprehensive about the imminent bankruptcy of Chinese real estate giant Evergrande. With liabilities estimated at more than US$300 billion, the developer impacted stock exchanges around the world by announcing that it would be unable to meet its financial obligations due on the 23rd. According to Bloomberg, the liability is divided between bonds and loans, which add up to $87 billion plus interest.
The risk of insolvency fell like a torpedo on the financial market, which immediately reacted by bringing down the trading floor and selling the company’s shares, which closed sharply lower on September 20th, with a -10% devaluation in Hong Kong .
Current Context
Evergrande was founded in the 1990s and benefited from extremely rapid urban growth, but at the expense of high indebtedness. It is the most indebted real estate group in the world and the second largest civil construction company in China. About 1.4 million properties are to be delivered, which contributed to the distrust of clients, suppliers and investors, fearful of the developer’s ability to honor what was contracted.
In order to calm the market, the company recruited experts to try to avoid the collapse and, according to Bloomberg, Chinese state regulators also sent a team of advisers to help the group. The Asian Development Bank’s director of macroeconomic research, Abdul Abiad, noted that “China’s banking system’s capital reserves are strong enough to absorb the impact, including the size of Evergrande, should that happen.”
Parallel with the Lehman Brothers case
The market retraction is due to the general panorama of Evergrande, but also to investors’ fond memories of what happened in the Lehman Brothers case. Its bankruptcy, in 2008, became a final moment for the financial crisis that followed and hit the entire global economy. In short, the bursting of the US mortgage bubble bankrupted the bank, which, in a kind of domino effect, spread the recession to other systems.
As Ricardo Bomfim pointed out, in an article published in InfoMoney, although there are similarities, including the company’s scale and its ability to infect other companies, analysts consider what Abdul Abiad highlighted: “the particularities of China and its real estate system make it unlikely that this event causes a crisis the size of the one seen at the end of the first decade of the 21st century”. In addition, Gavekal co-founder Louis-Vicent Gave mused that Chinese growth will disappoint, but that doesn’t signal an implosion.
Another point that distances itself from the total collapse is the importance of the real estate sector for the Chinese economy, which represents approximately 25% of the sector. In other words, it is not a simple task for the government to ignore the situation of the developer, which would then lead to a “Lehman moment”, as pointed out by Arthur Kroeber, partner and founder of Gavekal Dragonomics.
For Professor Roberto Dumas Damas, from Insper, the Evergrande case distances itself from the Lehman case as it is believed that the government will certainly act to prevent the bankruptcy of the developer, which employs more than 200,000 direct workers and 3.8 million people. indirect projects per year during the projects phase, with more than 1,300 projects still undelivered, mainly in low-income cities. In other words, the unattended downfall of Evergrande is unlikely as it would represent, with it, a profound threat to a system that, in turn, has the capacity to cushion that fall. Dumas, therefore, understands that this system will be preserved and that “some cost will be imposed on some players, but far from being a problem similar to that of the subprime in 2008”.
Recent steps
Faced with high market pressure, Evergrande announced today, the 22nd, an agreement with a local creditor to avoid default. In a statement to the Shenzhen Stock Exchange, its subsidiary Hengda said it had negotiated a plan to repay a bond maturing on Thursday, estimated at $35.9 million, according to Bloomberg.
The brief relief, however, does not supply the need for broader restructuring plans to be drawn up. Only then will trust become something more meaningful for the market, as Gary Dugan, chief executive of the Global CIO Office, told Bloomberg.
