Images of hundreds of employees with boxes in hand leaving the Lehman Brothers New York headquarters after the company went bankrupt on September 15, 2008 has become one of the lasting images of the global financial crisis, a visual shortcut of how a leading company in the industry can ruin and drag a nation – and the world – with it.
Now, images of disgruntled China Evergrande investors, employees and salespeople camped outside the company’s Shenzhen headquarters in recent weeks have the potential to become their own shortcut.
The real estate company is in great difficulty. On Monday, he failed to pay interest to at least two of his biggest bank creditors, Bloomberg News reported, and it looks like he will also fail to pay around $ 83.5 million in dollar bond interest. due Thursday.
Investors fear that an Evergrande default could send shockwaves through the Chinese and global economies, just as Lehman Brothers did in the United States and around the world in 2008.
But China in 2021 is not the United States in 2008, and what is less clear is how far the Chinese government is willing to go to avoid the social and financial upheaval that a disorderly collapse of Evergrande could provoke.
So will Evergrande turn out to be Lehman Brothers’ moment in China, or is the company too big to fail in President Xi Jinping’s China? Here’s what you need to know.
To summarize. What sort of business is Evergrande?
Evergrande currently holds the dubious title of the world’s most indebted real estate developer. Founded in 1996 by Hui Ka Yan, it has grown to become one of the largest companies in China, making Hui the 53rd richest person on Forbes’ 2021 billionaire list and 10th on its China Rich List 2020.
The company currently has 1,300 real estate projects in 280 cities in China, according to its website, and is also involved in electric vehicle production, property management, film and television production, theme park construction, insurance. -life, health, football and diet and baby. some products.
So how much debt is Evergrande?
The company has $ 300 billion in liabilities and its management has made it clear that it cannot afford to pay its various creditors on time.
This is of great concern to investors inside and outside of China, especially about a potential contagion effect.
What is that?
Simply put, it is the fear that unrest or crisis in one large corporation or country will spread to others. When Lehman Brothers filed for bankruptcy, for example, it had a contagion effect on other major financial institutions with which it had business relationships.
As it turned out, the US banking industry was made up of a relatively small number of players whose assets, interests and destinies were more closely intertwined than many realized. When Lehman fell, it sent shockwaves through many other businesses in the United States and beyond.
And thanks to globalization, the ties between the economies of entire countries are stronger and more numerous than ever before, so when the United States experienced its financial crisis of 2008-2009, the ripple effects were felt on the markets. markets around the world.
Likewise, as China is the world’s second-largest economy, what is happening in China with Evergrande has the potential to affect financial institutions and nations around the world.
Is the Evergrande saga already having a ripple effect?
Yes. Hong Kong’s Hang Seng Index fell 3.3% on Monday, and its real estate index fell 6.69% to a 52-week low. However, the broader index and the property index both closed on Tuesday.
Likewise, US stocks saw their biggest drop since May on Monday, fueled in part by concerns from Evergrande (uncertainty over whether the US Federal Reserve will signal this week that it plans to start cutting some of its economic support from the COVID era to the US economy is also worrying investors).
The turmoil of Evergrande is also being felt in the commodity markets. This helped push copper prices down to nearly a month, as investors feared demand for the metal, which is used in construction, would suffer if Evergrande’s massive construction projects halt. Prices for iron ore and crude oil also fell amid fears of weakening demand from China.
So, are only companies with links to China impacted?
No. Concerns over Evergrande have also had an impact on stocks of companies with little connection to China, an indication that Evergrande’s uncertainty has contributed to some of the broader investor worries that are in the air this week.
“You’ve got a whole bunch of things you need to worry about – throw that headline into the mix and it turns it all wrong,” Art Hogan, chief strategist at the National Securities Corporation, told Bloomberg News. “So there’s going to be irrational risk reduction that doesn’t logically connect. Does it make sense for tech stocks to sell? No, but in a risk-free scenario everything tends to be for sale, even cryptocurrencies. “
Indeed, Evergande’s nervousness also spilled over to the world’s largest cryptocurrency, Bitcoin, which fell to $ 40,468 on Monday, according to CoinMarketCap.
Will we definitely witness a contagion effect in the Chinese banking sector?
Nothing is ever certain in the markets. But on Monday, S&P Global Ratings gave its opinion.
“We believe the Chinese banking sector can digest an Evergrande default without significant disruption, although we are mindful of potential spillover effects,” Ryan Tsang, credit analyst at S&P Global Ratings, said in a report. “Evergrande is small compared to the total loans from Chinese banks. The direct exposure of the banking sector to Evergrande also appears to be well distributed.
What about other Chinese real estate companies?
“We expect the default risks of weaker and more leveraged real estate developers to increase,” Christopher Yip, credit analyst at S&P Global Ratings, wrote in the same report.
What about small investors?
They are very worried, so much so that retail investors, vendors and even Evergrande employees have gathered outside the company’s offices to demand repayment of loans and other financial products.
Are these kinds of protests not unusual for China?
You bet. China is a country that values social stability. But some analysts see it as a reason for the government to step in and limit the potential fallout that could hurt little guys.
“[The protests] is one more reason for them to try and fix what they can with this Humpty Dumpty, ”Edward Yardeni, president of Yardeni Research, told Al Jazeera.
“Humpty Dumpty is taking a big crash, and if anyone can pick it up to some extent, it’s the Chinese government because it has so much control,” he added. “I think they’re worried that there will be more eggshells breaking if they don’t process this one right away.”
Why wouldn’t China bail out Evergrande?
Governments are always concerned that if they step in and bail out companies that have behaved recklessly – such as taking on much more debt than they can afford – it signals to other big companies that they can behave just as badly because that the government is always going to be there to give them a lifeline. This is what economists call “moral hazard”.
In addition, the Chinese government has attempted to cool the country’s real estate market and reduce its importance to the overall economy. One way to do this is to curb excessive borrowing from developers like Evergrande.
What does the future of the Chinese real estate market look like?
The industry as a whole could face problems due to declining demand for housing and changing demographics in China, where the population is aging rapidly.
“The root of Evergrande’s problems – and those of other highly leveraged developers – is that demand for residential properties in China is entering an era of sustained decline,” wrote Mark Williams, chief economist at Capital. Economics for Asia, in a September 15 note.
So, Evergrande China’s Lehman Brothers moment?
That’s the $ 300 billion question. Analysts at Citigroup and Barclays Bank said they did not believe him. Yardeni either.
“I don’t think it will be a Lehman Brothers moment because Lehman has not been bailed out. The US Treasury and the Fed made a very conscious decision not to bail out Lehman – they failed to understand how his failure would have global repercussions, ”Yardeni said. “I think the Chinese government is very aware of the risks associated with Evergrande. I don’t think they’re going to bail it out so much to restructure it.
But on Tuesday, one of the world’s richest bankers, Uday Kotek, tweeted that “Evergrande appears to be China’s Lehman moment.”
Kotak, CEO and founder of Indian lender Kotak Mahindra Bank, compared the Evergrande saga to the fate of Infrastructure Leasing & Financial Services Ltd, whose restructuring he helped oversee after defaulted on its debt.
Evergrande appears to be China’s Lehman moment. It reminds us of IL&FS. The Indian government acted quickly. Bringing calm to financial markets. The government-appointed board of directors estimates a 61% payback at IL&FS. Evergrande bonds in China are trading ~ 25 cents to one $.
– Uday Kotak (@udaykotak) September 21, 2021