It seems like ten plus years later China may be having its “Lehman Brothers moment”. And it has rocked the global stock market. Let’s unpack.
What is Evergrande? The Evergrande Group is China’s premier real estate property developer “with some 1,300 projects across more than 280 Chinese cities. Its operations cross over into other industries, including wealth-management products, electric vehicles, consumer goods, and sports”. Evergrande has also incurred quite a bit of debt to fund its continued growth. And like all debt it eventually has to be paid back. Oops! Therein lies the rub. But not just for Evergrande, for global stock investors. This premier company is in debt to the tune of $300 billion.
How did this happen? China’s economy has boomed for years. I suppose Evergrande did not stick to their plan. And according to their very sophisticated website they had a good one.
Forewarned is forearmed, without prejudging the waste. No matter how big or small things are, the key lies in planning, and no matter how big or small, the key lies in carefulness. There must be a plan from time to time and a plan for everything. Make decisions before acting, think twice before acting, boldly imagine, repeatedly deliberate, and plan carefully.
So how did they derail themselves? Perhaps they did not practice what they preached. They borrowed too much in recent years to pay for their business ventures. I suppose building the world’s world’s biggest soccer stadium is a must do even if it costs $1.7 billion.
The group has gained infamy for becoming China’s most indebted developer, with more than $300 billion worth of liabilities. Over the last few weeks, it’s warned investors of cash flow issues, saying that it could default if it’s unable to raise money quickly.
With that kind of debt investors feared the worst – the “I” word: insolvency. And on Monday, September 20 it came to a head for a company whose stock resembled a ball rolling downhill for a year.
Reportedly, Evergrande also owes money to about 171 domestic banks and 121 other financial firms. Therefore, if the company defaults completely, there will be consequences for the banking system. A credit crunch could follow, analysts fear, which would be bad news for China and the global economy.
Markets were spooked on Monday with America’s S&P falling 1.7% after Evergrande closed 10% down in Hong Kong – the lowest since May 2010. But the territory’s Hang Seng index recovered on Tuesday, closing up 0.5%, and the S&P has also regained lost ground.
Death may be imminent. Evergrande may be on life support for the moment but not for long. Will the Chinese government bail Evergrande out? Is the company too big to fail? Will the Chinese government make an example of them? Is any company too big to fail?
The very serious potential fallout of such a heavily-indebted company collapsing has led some analysts to suggest that Beijing may step in to rescue it. The EIU’s Mattie Bekink thinks so: “Rather than risk disrupting supply chains and enraging homeowners, we think the government will probably find a way to ensure Evergrande’s core business survives.” Others though are not sure. In a post on China’s chat app and social media platform WeChat, the influential editor-in-chief of state-backed Global Times newspaper Hu Xijin said Evergrande should not rely on a government bailout and instead needs to save itself. This also chimes with Beijing’s aim to rein in corporate debt, which means that such a high profile bailout could be seen as setting a bad example.
The fallout of Evergrande failing is great. It would not only impact China’s economy it would impact economies worldwide which is why global markets had a minor heart attack on Monday. And Evergrande has a busy week with two interest payments due: one on September 23 and the other on September 29. The amounts don’t seem like that much for a global monster – chump change really – but they may not be able to make those payments. If not, what will the Chinese government let happen?
With over $300 billion in liabilities, Evergrande is the most indebted real estate company in the world. For comparison, Russia’s state debt in 2020 was $257 billion. If the company goes bust, it could dramatically impact China’s entire economy. Since China is a major trading partner for most countries around the world, economic problems within the country could reverberate widely.
Evergrande, which last year generated $77 billion in revenue, has two repayments due in the coming weeks. First, an $83 million interest payment due Thursday, according to Reuters, and another repayment, for a different bond, is due Sept. 29. That second one is reportedly for $47.5 million. On Sept. 14, Evergrande told its investors that it may be unable to fulfill these obligations.
But on Wednesday Evergrande announced that they would make the debt payment due on Thursday to investors in China but did not indicate whether they planned to make payments to investors abroad.
BEIJING — A Chinese real estate developer whose struggle to avoid defaulting on billions of dollars of debt has rattled global markets says it will pay interest due Thursday to bondholders in China but gave no sign of plans to pay on a separate bond abroad.
Evergrande’s main unit, Hengda Real Estate Group said in a statement on Wednesday it had “resolved” one coupon payment due on Thursday on its Shenzhen-traded 5.8 percent September 2025 bond, but it did not specificy how much interest it would pay or when.
Evergrande appears to be trying to buy time for “an orderly default rather than a shocking implosion” by paying bondholders in China on time while skipping payments abroad, said Vishnu Varathan of Mizuho Bank in a report. “Averting a default altogether is highly unlikely,” Varathan said.
The Chinese government is being a strict parent. They are still “mums the word” on whether they will help their wayward child.
In any default scenario, Evergrande, teetering between a messy meltdown, a managed collapse or the less likely prospect of a bailout by Beijing, will need to restructure the bonds, but analysts expect a low recovery ratio for investors. S&P Global Ratings said on Monday it believed the Chinese government would only act in the event of a far-reaching contagion posing systemic risks to the economy.
And maybe they – the Chinese government – are waiting to bring order back into Evergrande’s world at just the “right time”.
This is an evolving story.
Author: Sherri Margolin (Dark Matters)