Evergrande’s headquarters are seen in Shenzhen, southeast China’s September 14, 2021 when the Chinese real estate giant said it was facing “unprecedented trouble,” but denied rumors that it would go under.
Noel Celis | AFP | Getty Images
Evergrande holds physical assets
In terms of the extent of the possible impact on international financial markets, however, analysts point to a huge difference between the Evergrande crisis and the Lehman collapse: Evergrande holds land while Lehman holds financial assets.
Evergrande has cash flow problems, but talk of systemic risk is “a bit of an exaggeration, frankly,” said Rob Carnell, regional research director for Asia-Pacific at ING, on CNBC’s Squawk Box Asia on Wednesday.
“Let’s face it, this is not Lehman’s, this is not LTCM,” Carnell said, referring to a large American hedge fund, Long-Term Capital Management, that failed in the 1990s. “It’s not a hedge fund with massive leveraged positions or a bank whose asset prices are skyrocketing. It’s a real estate development company with quite a bit of debt, $ 300 billion and more in dollar terms.”
He expects the company to complete, sell, and begin paying off its development projects when Evergrande puts some cash flow into its physical assets.
On Wednesday, the company’s real estate group announced that it would pay interest on a mainland-traded yuan bond on time.
“Evergrande is facing a liquidity crisis despite owning a large land bank,” said Larry Hu, chief economist for China at Macquarie, in a report Tuesday. He noted that the developer’s net worth consists mainly of land and housing projects valued at just over 1.4 trillion yuan ($ 220 billion).
No Lehman-style infection story makes sense here and therefore there won’t be a Lehman moment.
The 2008 collapse of Lehman Brothers resulted in a collapse of financial derivatives – credit default swaps and collateralized debt obligations – “which caused the market to question the health of other banks,” Hu said.
“But the Evergrande saga is pretty unlikely to cause the price of land to plummet,” he said. “After all, the value of land is simply more transparent and stable than financial instruments. This is especially true in China, where the local government monopolizes the supply of land.”
“As a result, [the] The local government has a strong incentive to stabilize the price of land. In the worst case scenario, local government could even buy back land as they did in 2014-15, “he added.
Strong state control
Another key difference in Evergrande’s case is the greater degree of government control and involvement in the Chinese real estate industry.
“Chinese banks and many other institutions are first and foremost government weapons, secondly intermediaries,” said analysts for market research firm China Beige Book in a report on Monday. “Even non-government finances can be controlled to an extent rarely seen outside of China. Commercial bankruptcy is a decision of the state.”
“Beijing says borrow, so you borrow; when or whether you get your money back is secondary,” the report said. “No Lehman-style infection story makes sense here and therefore there won’t be a Lehman moment.”
The legendary US investment bank collapsed 13 years ago this month in an iconic moment of the global financial crisis. The bank wrote tens of billion dollars worth of securities backed by risky mortgages during a US housing bubble. The US government eventually failed Lehman and saved other financial institutions at the same time.
In the case of China, Beijing has tried to give the market a bigger role in the economy by defaulting loans from more state-owned companies.
Authorities will be patient on Evergrande’s case as they have two goals in preventing excessive risk taking and maintaining stability in the property market, Macquarie’s Hu said.
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“Policymakers would choose to wait first and then intervene later to ensure an orderly debt restructuring,” he said. “A wholesale bailout is unlikely and shareholders / lenders could suffer a huge loss. But the government would ensure that the pre-sold homes are ready and delivered to the homebuyers.”
Hu also noted the Chinese government’s recent track record in restructuring giants such as Anbang Insurance, Baoshang Bank, HNA Group and China Huarong Asset Management. “China’s banking system has an annual profit of 1.9 [trillion yuan] and a provision of 5.4 [trillion yuan]that could easily absorb the loss of Evergrande, “he said.
“China has the tools,” says IMF
In Evergrande’s case, the developer has more direct links with foreign investors than most of the Chinese economy.
The company has a total of around $ 19 billion in outstanding offshore bonds, according to data from investment bank UBS, which equates to about 9% of US dollar-denominated Chinese bonds. Evergrande’s total debt of approximately $ 313 billion is roughly 6.5% of the total debt of China’s real estate sector, the report said.
UBS analysts expect Evergrande to restructure its debt and predict that bond prices will recover from their lows and limit contagion.
The analysts also outlined a number of possible spillover effects if Evergrande were to enter the less likely scenario of full liquidation, such as the collapse of exposed banks and the sale of emerging market bonds.
International Monetary Fund chief economist Gita Gopinath told Reuters this week that the organization believes “China has the tools and policy space to prevent this from developing into a systemic crisis.”
The IMF can organize rescue operations for countries or regions in financial need.
Even though public government statements in the past few months have called for major financial risks to be avoided, the intervention of the Chinese authorities cannot be taken for granted.
Chinese officials have so far made few major public statements about Evergrande.
At a news conference last week, a spokesman for the National Bureau of Statistics said the department is monitoring the troubles of some large real estate companies and the potential impact on the economy.
Moody’s estimates that China’s real estate market, along with related industries such as construction, accounts for more than a quarter of the country’s GDP.
Betting that house prices would only go up eventually forced many Chinese households to take out mortgages in order to buy houses. In recent years, the government has tried to cool the market with measures such as restricting the amount of debt developers can take on.
– CNBC’s Eustance Huang and Weizhen Tan contributed to this report.