Infotech What is hiding the crisis of the real estate giant Evergrande in China?

What is hiding the crisis of the real estate giant Evergrande in China?

Real estate in China is worrying. For nearly a month, the giant Evergrande has been in turmoil. Over-indebted to the tune of 260 billion dollars, the company, which supplies nearly 4 million direct and indirect jobs in the country, has stopped all of its projects. The group had announced on September 14 not to be able to honor its obligations.

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Fueling concerns about this sector, it’s Fantasia’s turn to find itself in the infernal cycle of debt. The Chinese promoter failed to meet its payment obligations: Monday, October 4, he was unable to repay the $ 205.7 million owed to his creditors. Another promoter, Sinic, also saw his rating downgraded on Tuesday by the agency S&P Global Ratings, which believes that its “Debt service capacity is almost exhausted”.

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“China has the means to intervene”

So what fate does Beijing have in store for the jewels of its economy? In the past, the government has repeatedly rushed to the aid of struggling businesses. In 2015, for example, following a stock market crash, $ 1 trillion in foreign exchange reserves, “Cash”, had been used to save the banks. “By recapitalizing the banks before the crisis spread to the general public, it went unnoticed”, indicates the economist and president of the consulting firm ACDEFI Marc Touati.

But Beijing seems determined to abandon this lever: “Today, China has $ 3 trillion in foreign exchange reserves in its possession. It has ample funds to intervene and prevent the slippages of these companies. But she doesn’t. “ It remains to be seen why, especially since “The sector today represents nearly a third of Chinese growth”, explains Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at Natixis.

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Accompanying the massive urbanization of China, the real estate market has indeed experienced significant growth over the past twenty-five years. Like other developers, Evergrande relied for years on sustained demand and rising prices, initiating construction projects across the country. And this growth has been accompanied by massive indebtedness.

Huge financial pressure

The scheme is simple. To build, real estate developers have to go into debt. Once built, the buildings are put up for sale or rent, which allows the company to receive dividends. This income is then used to repay the interest on the debt. “As long as the debt increases, but the income is sufficient to repay the interest, there is no problem”, supports Marc Touati.

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Until now, the system managed to self-maintain. Except that the coronavirus crisis has been there. “Evergrande, Fantasia and other promoters have counted on strong and sustainable growth of the Chinese economy. This year, this growth is around 8/9%. It’s a good performance, but not enough to increase the flow from the provinces to the cities ”, indicates Marc Touati. The buildings of Evergrande are built, but remain empty. Without revenue, the company cannot support its debt, which has grown exponentially to $ 260 billion, almost the equivalent of Denmark’s GDP. Its sites are now everywhere at a standstill. And on September 13, the company admitted to facing financial pressure ” huge “.

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Interest payments on two bonds totaling over $ 80 million fell due at the end of September. The company has until October 21 to respond.

“A Robin Hood economy”

So what is Xi Jiping’s government waiting for? For Alicia Garcia-Herrero, it is for Beijing to make Evergrande an example of a “Big turnaround in China’s objectives” : “From an obsession with growth to an obsession with prosperity”. While in the country, it takes an average of twelve years of average salary to be able to buy an apartment of 15 m² (a figure which rises to twenty-seven years in the largest cities like Beijing), many households are still excluded from this. growth. A bursting of the real estate bubble would lower prices, making the market more accessible to the Chinese population.

“It’s a Robin Hood kind of economy. The government wants to show that it cares about the Chinese people rather than the investors. Pushing Evergrande down the precipice is a very populist measure, it is doing what households who cannot find housing expect. Finally, the government’s inaction in the face of bankruptcy is a key campaign argument for Xi Jinping. “In Beijing, the hubris of the centenary of the Communist Party

Marc Touati, he imagines another possibility. “It is possible that the Chinese government wanted to make Evergrande an example. But it is also possible that he is simply overwhelmed by events. “ The lack of control over his communication could be a sign. For the economist, this situation would be “Much more worrying because Evergrande would only be the tip of the iceberg”.

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Towards a Chinese Lehman Brothers?

Whatever the real reason for the lack of response from the Chinese government, the crisis that Evergrande is going through is not unlike that of the American bank Lehman Brothers, whose bankruptcy in 2008 led to a global crisis. Is such a scenario possible? The two economists are categorical. As the Chinese financial market is less interconnected with the rest of the world than Wall Street, systemic risk is low. “Investing in China is very complicated. A few European and American companies have certainly invested money, but nothing comparable with Lehman Brothers ”, explains Marc Touati. “There is no such thing as zero risk, but a scenario similar to the subprime crisis is unlikely”, adds Alicia Garcia-Herrero.

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Nevertheless, the global economy could be indirectly impacted by a bankruptcy of Chinese real estate. A slowdown in the Chinese economy would ultimately lead to a slowdown in the world economy. “When the locomotive of the world stops, the whole train is immobilized”, metaphorizes the president of ACDEFI. “It will not be this year, nor even in 2022, because it is an election year for Xi Jinping and everything will be done to support growth. But we can expect a drop in 2023 “, concludes Alicia Garcia-Herrero. The countdown begins.

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