Evergrande: Chinese property giant spooks global markets

Global markets fell this week as investors worried about the fate of Evergrande, China’s most indebted property developer, which is teetering on the brink of default.

“A wave of fear over Chinese economic growth swept through global markets on Monday,” say Narayanan Somasundaram and Jack Stone Truitt on Nikkei Asia. Markets dropped in Asia, Europe and the US, where the Dow Jones Industrial Average at one point fell 972 points (almost 3%) before paring losses to 1.8% before the close. Behind the bout of jitters lay the fate of Evergrande, China’s most indebted property developer, which is teetering on the brink of default.

An Evergrande bankruptcy would “amount to a financial tsunami”, says Caixin. The firm has ¥2trn (£227bn) in known liabilities (about 2% of China’s GDP), plus unknown amounts of off-book ones. Some analysts say it could be “China’s Lehman Brothers”, referring to the 2008 collapse of the US investment bank that helped trigger the global financial crisis.

Risks are manageable 

That’s an exaggeration, say analysts at Barclays. Evergrande is big and there will be consequences for China’s real-estate sector. “But a true ‘Lehman moment’ is a crisis of a very different magnitude.” It would entail a “lenders strike” across the financial system,  a “sharp increase in credit distress” outside real estate and banks not being willing to lend to each other in the interbank market. 

Evergrande won’t cause that. First, its financial-system liabilities are much smaller than its headline liabilities (more than half the total is what it owes to suppliers) – it has around ¥227bn in bank loans and about ¥158bn in offshore and onshore bonds. Second, China has “navigated successfully through a number of defaults and restructurings” lately, including the financial conglomerate Huarong, which had about ¥1.4trn in liabilities. There’s no reason to expect policymakers to mess up this time. Third, Evergrande – and other Chinese property firms – aren’t at the mercy of wholesale funding markets, as Lehman was. “In an extreme scenario where capital markets are shut to all Chinese property firms … which is not occurring … regulators could direct banks to lend to such firms, keeping then afloat.”

Unpredictable consequences

The crisis is not a Lehman moment, concurs Bill Bishop in his Sinocism newsletter. “But it is ugly and will get uglier.” It’s rash to assume policymakers “have a full understanding of all the Evergrande liabilities and interconnections with other firms” Some form of bailout will happen, but “the lack of guidance from regulators seems to be spooking investors”.

This “is far from being a well-managed process”, agrees The Economist – hence bonds from other developers such as R&F, Fantasia and Sinic have slumped over fears they may be next. The underlying issue is that Xi Jinping, China’s president, is cracking down on excess debt in real estate as “one of several campaigns [he] is using to remould the country”. So the contagion risks aren’t just about markets. Real estate accounts for 20%-25% of GDP, thus “an extended campaign against developer debt could significantly lower China’s growth prospects... and lead to greater economic and financial turmoil down the road”. 

Recommended

Investor optimism ebbs in Indian stockmarkets
Emerging markets

Investor optimism ebbs in Indian stockmarkets

India’s BSE Sensex stockmarket index has fallen by almost 8% so far this year. Interest rates are on the rise, and foreign investors have been selling…
18 May 2022
Aviva: a share for income investors to tuck away
Share tips

Aviva: a share for income investors to tuck away

Insurance giant Aviva is one of the highest yielding stocks in the FTSE 100 – and it’s cheap, too, making it a tempting target for income investors. R…
18 May 2022
The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Inflation is now at its highest since 1982 – is this the peak?
Inflation

Inflation is now at its highest since 1982 – is this the peak?

At 9%, UK inflation is at its highest for 40 years – and it’s not going anywhere soon, says John Stepek. That means you need to be much more active a…
18 May 2022

Most Popular

Get set for another debt binge as real interest rates fall
UK Economy

Get set for another debt binge as real interest rates fall

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble, says Matthew Lynn.
15 May 2022
Is the oil market heading for a supply glut?
Oil

Is the oil market heading for a supply glut?

Many people assume that the high oil price is here to stay – and could well go higher. But we’ve been here before, says Max King. History suggests tha…
16 May 2022
Value is starting to emerge in the markets
Investment strategy

Value is starting to emerge in the markets

If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy tra…
16 May 2022