October 27, 2021

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Investors around the world are holding their breath: What's going on in Chinese real estate giant Evergrande?

Investors around the world are holding their breath: What’s going on in Chinese real estate giant Evergrande?

The most debt in the world, you have to earn it. That dubious honor goes to Evergrande, which is $300 billion in red. No company in the world can imitate founder Xu Jiajin. Until recently, China’s largest real estate consortium was a real economic bolus.

Football clubs, mineral water, electric cars, healthcare, parks: you name it and Evergrande had a finger on it. It was, because it’s over. Evergrande stands on the brink of collapse. Paying off the interest on outstanding debt is not possible, and the group thought it was no better than throwing its giant real estate portfolio into the balance. The company wanted to repay its creditors for apartments, offices and retail space at discounts of up to 50 percent. That has been stopped and all we have to do now is wait for the official bankruptcy of the group, which has more than 800 real estate projects underway in 280 cities. Inventory has decreased and the company can no longer count on financial support. The group is set to pay $83.5 million in bond interest this week alone and another $47.5 million by the end of this month.

knife to the throat

“The government has really put a knife in the throat of the Evergrande,” said Coen de Leos, China expert and chief economist at BNP Paribas Fortis. Part of the Chinese economy is driven by speculation, including real estate. More than a quarter of all Chinese investment in real estate, resulting in ghost towns of vacant speculative apartments and mountains of unimaginable debt. “Chinese President Xi Jinping fears that the massive accumulation of debt in his country, including outside the mainstream banking sector, has become very dangerous.”

Several stakeholders are involved in the massive scandal. Suppliers, homeowners, asset managers, and countless investors are seeing their profits evaporate before their eyes. “This is both an economic and a political problem,” says de Leos.

The big question is to what extent the Chinese state sticks to its position. Beijing has been trying to fight bubbles in the housing market for years. However, once the brakes are seriously applied, project developers, banks and municipalities are in so much trouble that the government steps in, fearing a major meltdown. When the “burst” of debt and financial risk explodes unchecked, other sectors become infected. More than 128 banks and 121 financial institutions are said to have loans outstanding with Evergrande: the risk is high that they will be exposed to this giant.

Koen De Leus of BNP Paribas Fortis: “This is an economic and political problem.”rv . picture

bankruptcy

If the Evergrande goes bankrupt, the indirect jobs of 3.8 million Chinese will rise significantly. If the malaise spreads to other real estate companies and their investors, the economic meltdown that has been predicted for years is a reality, because a quarter of the Chinese economy is dependent on real estate. The Evergrande wasn’t called the Lehman Brothers of Asia for nothing. That US bank that overturned in 2008 signaled the beginning of the financial crisis that hit the whole world.

“I think the Chinese government has a Plan B,” says Coen de Leos. The dismantling of the real estate giant should prevent the complete collapse of the Chinese economy. De Leus doesn’t immediately fear global repercussions like the Lehman Brothers did at the time. “I don’t think there are many relationships with Evergrande and the rest of the world. It seems to me that the risk of contagion to European banks or companies is minimal. I see the fact that stock markets are now responding around the world more as a limited stock market correction, which was coming.” Shares lost about 2.5 percent worldwide.

This week, people gathered at Evergrande's headquarters in Shenzhen, China, to protest against the conglomerate's actions.  AFP photo

This week, people gathered at Evergrande’s headquarters in Shenzhen, China, to protest against the conglomerate’s actions.AFP photo

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