Ethe listing of vergrande shares was suspended by HKEX on Monday. As the Chinese real estate giant missed some of the coupon payments to its overseas bondholders last Wednesday. The interest payment was to pay $ 47.5 million. The company is now facing debts of more than $ 300 billion. Will Evergrande be China’s “Lehman”, causing a domino effect for the global economy? It’s quite unlikely.
How did Evergrande get into a debt crisis?
Evergrande is known as a high yield bond issuer and relies on the rapid turnover of its discounted properties as a business model. Long debt activity is finally collapsing due to the abandonment of government policy to dismantle the debt bubble in the real estate markets. The value of the Chinese real estate market was $ 62.6 trillion, or 414% of GDP in 2020, which was close to the level in Japan in the 1990s before the collapse of the Tokyo real estate market. To cool the housing market, the PBOC announced “three red line” measures on debt to its real estate developers in 2020. The policy placed limits on the debt ceiling on liabilities to assets, net debt. on equity and cash on short-term borrowings. . The policy not only tightened credit conditions for developers, but also held back real estate investors. Evergrande has since been strained by debt problems and the debt bubble has finally burst.
Evergrande’s debts include onshore and offshore bonds, loan funds in local and foreign currencies, and late payments for its workers. It has 200,000 employees and indirectly supports 3.8 million jobs. It also has 1,300 projects underway in 280 cities. Beijing is likely to intervene and manage the crisis to avoid a larger financial market and possible social unrest. Maybe it’s like how they handled the NHA crisis in February. However, the Chinese government may not directly inject the money or buy back the debts of Evergrande. Instead, they will urge state-owned companies to buy their debts and assets by restructuring the business. Therefore, the spillover of the crisis out of China is unlikely.
How is the crisis affecting the Chinese economy?
The housing market and related industries account for one third of economic activity in China. Kenneth, professor of economics at Harvard Rogoff said that Evergrande The crisis could cause a loss of 1-2% of China’s GDP in 2021. But if Beijing takes action to deal with the crisis and keep all projects going, the following story will be different.
However, the Chinese economy will certainly slow down in 2021 due to the measures taken to limit the leverage of real estate debts. China is reforming the economic structure. The country will invest more in new technologies and the AI industry rather than relying on land sales and real estate development.