Tuesday, September 14, 2021

Is China Headed Into An Economic Crisis?

    A large Chinese property firm, Evergrande, is facing bankruptcy and defaulting on $300 billion in debt to finance its property and investment deals. It is sparking fears of a wider crisis in China's banking and property markets. 

    The Daily Mail is reporting this morning that "China's Lehman Brothers moment? Investors mob HQ of failing Chinese property conglomerate with $300BILLION of debt to demand their money back - amid fears giant company could collapse and hit the world economy." From the article:

    Investors demanding their money back have mobbed the headquarters of a failing Chinese property company with huge $300billion debts amid fears it is about to collapse and devastate the Chinese economy.   

    Around 100 anxious investors yesterday forced their way into the lobby of the Shenzhen headquarters of the property giant Evergrande after it said it was facing 'unprecedented difficulties'. 

    The Hong Kong-listed developer is sinking under a mountain of liabilities totalling more than $300 billion after years of borrowing to fund rapid growth. 

    An estimate by Capital Economics says that Evergrande has some 1.4 million properties that it has committed to complete - around 1.3 trillion yuan ($200 billion) in pre-sale liabilities, as of the end of June.

    Its plight has raised fears of a contagion across the debt-laden Chinese property sector - which accounts for more than a quarter of the economy - with a knock on for banks and investors.

    Some analysts have questioned if China faces a 'Lehman Brothers moment' in reference to the collapse of the Wall Street investment bank that triggered the 2008 credit crunch.  

    CNN reports that "Chinese property giant Evergrande warns again that it could default on its enormous debts." That article relates:

    Evergrande is once again warning that it could default on its huge debts as it struggles to cut costs or find anyone to buy some of its assets.

    The embattled Chinese property giant has already warned in recent weeks of its cash crisis, listing $300 billion in total liabilities and saying that it could default if it's unable to raise money quickly.

    Should that happen, the effects would be felt across China's banking system and the wider economy. The group has already suspended work on some projects as it tries to conserve cash, a move that's poised to hit China's property sector.

    Markets in the region shook on Tuesday. The Shanghai Composite (SHCOMP) closed down 1.4%, while Hong Kong's Hang Seng index (HSI) fell 1.2%.

    Evergrande disclosed on Tuesday that it had made "no material progress" in its search for investors to buy part of its stakes in its electric vehicle and property services businesses.

    "If the group is unable to meet its guarantee obligation or to repay any debt when due or agree with the relevant creditors on extensions of such debts or alternative agreements, it may lead to cross-default," it said.

    The company also announced in a stock exchange filing in Hong Kong that it had enlisted financial advisers to "evaluate the liquidity of the group and explore all feasible solutions" as quickly as possible. But the company cautioned that nothing was guaranteed.

    The disclosure came hours after Evergrande, which is one of China's largest real estate developers, had sought to reassure the public about its business. In a statement Monday night, the Shenzhen-based conglomerate addressed "recent comments" on the internet, saying that any bankruptcy rumors "are completely untrue."


    "Evergrande's collapse would be the biggest test that China's financial system has faced in years," Mark Williams, Capital Economics' chief Asia economist, wrote in a note last week. He predicted that the country's central bank "would step in with liquidity support" if fears of a major default intensified.

    Financial restructuring specialist Houlihan Lokey and Hong Kong-based Admiralty Harbour Capital are now serving as the firm's advisers.

     And, from Reuters: "Analysis: China's house of cards: Evergrande threatens wider real estate market." This article explains:

    Founded in Guangzhou in 1996, Evergrande has epitomised China's freewheeling era of borrowing and building, but with liabilities of nearly two trillion yuan ($305 billion) its possible collapse looms as one of China's largest for years.

    Debt and land-buying curbs and hundreds of new rules have been imposed on Chinese developers over recent years as part of a push to cut financial risks and promote affordable housing.

    Evergrande (3333.HK), which accelerated efforts to cut its debts in 2020 after regulators introduced caps, does not have any major offshore bond maturities until early next year but tardy payment of suppliers and interest on loans have brought to a head concerns that have long nagged at investors.

    Now, without access to fresh funding, Evergrande cannot pay suppliers, finish projects or raise income, prompting it to hire advisors and warn of default risk. This, along with a buyout, break-up or bailout are the scenarios now being evaluated. 

    And while analysts have played down comparisons to the 2008 collapse of U.S. investment bank Lehman Brothers, which caused crises at counterparties and ultimately seized up global markets, some investors have similar contagion concerns.

    "If as expected Evergrande is defaulting on its debt and goes through a restructuring, I don't see why it would be contained," Michel Lowy of banking and asset management firm SC Lowy, which focuses on distressed and high-yield debt, said.

    "There are other developers that are suffering from the same problem of no access to liquidity and have extended themselves too much," Lowy added.

    Other worries include the exposure of banks and the determination of regulators to press on with property market reforms despite hints of damaging consequences. 

The article continues:

    The most immediate concern is of a real estate crash rather than a Lehman-style financial crisis. An Evergrande fire sale could crush prices, causing leveraged developers to blow up and crippling a sector comprising a quarter of China's economy.

    "Lehman (was) very different as it went across the financial system, freezing activity," said Patrick Perret-Green, an independent London-based analyst.

    "Millions of contracts with multiple counterparties, everyone was trying to work out their exposure," he said. "With Evergrande it depresses the entire real estate sector."

    Bank exposure is also wide and a leaked 2020 document, written off as a fabrication by Evergrande but taken seriously by analysts, showed liabilities extending to more than 128 banks and over 121 non-banking institutions.

Check out this Bloomberg article for more analysis.


  1. Yup, this could be the one. Depends on how much funny money is invested there. Will the Fed paper it over?

    1. Once one major economy goes, they all will probably collapse or go into deep depressions. Will China’s central bank intervene? I don’t know. The Bloomberg article indicated some downsides to China continuing to kick the can down the road. I wish we had more info on who holds the debt for this Chinese firm. It would be nice to know if an American bank or investment firm was overextended on this risk.


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