This is why the Evergrande crisis is not China’s “Lehman moment”

This is why the Evergrande crisis is not China's

The Evergrande headquarters is seen in Shenzhen, southeast China, on September 14, 2021, as the Chinese real estate giant said it was facing “unprecedented hardship” but has denied rumors that he was about to fall.

Noël Selis | AFP | Getty Images

Evergrande has material goods

However, when it comes to the magnitude of the potential impact on international financial markets, analysts point out a major difference between the Evergrande crisis and the Lehman collapse: Evergrande owns land, while Lehmann owns assets. financial.

Evergrande has cash flow issues, but discussions of systemic risks are “a little high, clearly,” Rob Carnell, regional research manager for Asia-Pacific at ING, said Wednesday on “Squawk Box Asia” of CNBC.

“Let’s face it, it’s not Lehman, it’s not LTCM,” said Cornell, referring to Long-Term Capital Management, a large US hedge fund that went bankrupt in the 1990s. t is not a hedge fund with heavily leveraged positions or a bank with financial asset prices heading towards zero. It’s a real estate development company that’s got a lot of debt, you know, in dollars. in more than 300 billion.

He hopes that if Evergrande manages to generate cash flow in its physical assets, the company can complete its development projects, sell them, and start paying down debt.

On Wednesday, the company’s real estate group said it will pay interest on yuan-denominated mainland trade bonds in due course.

“Evergrande is facing a liquidity crisis, despite having a large land reserve,” Macquarie’s chief economist for China, Larry Hu, said in a report on Tuesday. He said the developer’s assets consisted mainly of land and housing projects valued at more than 1.4 trillion yuan ($ 220 billion).

No Lehmann-style contagion story is understood here and so there will be no Lehmann moment.

The collapse of Lehman Brothers in 2008, which led to a crash in financial derivatives – credit default swaps and secured debt obligations – “cast doubt on the health of other banks,” Hu said.

“But it is highly unlikely that the Evergrande saga will bring down the price of land,” he said. “After all, the value of land is more transparent and stable than financial instruments. This is particularly the case in China, where the local government monopolizes the supply of land.

“Therefore, [the] Local authorities are strongly encouraged to stabilize the price of land. In the worst case, local governments can buy back the land, as they did in 2014-15.

strong government control

Another important difference in the case of Evergrande is the greater level of government control and involvement in the Chinese real estate sector.

“Chinese banks and many other entities are arms of the government first, then middlemen,” analysts at research firm China Beige Book said in a report on Monday. “Even non-state finance can be controlled to a degree rarely seen outside of China. Commercial bankruptcy is a choice of the state.

“Beijing says lend, so you lend; when or even whether or not you get your money back is secondary, ”the report said. “No Lehmann-style contagion story is understood here and therefore there will be no Lehmann moment.”

The famous American investment bank collapsed 13 years ago this month at an emblematic moment of the global financial crisis. The bank underwent tens of billions of dollars in subprime mortgage-backed securities during the US housing bubble. The US government ultimately allowed Lehman to go bankrupt, while ousting other financial institutions.

In the case of China, Beijing has tried to allow the market to play a bigger role in the economy by defaulting on loans from more state-owned enterprises.

Hu of Macquarie said executives will need to be patient with Evergrande because they have two goals: to take excessive risk and to keep the real estate market stable.

“Policymakers will choose to wait first, then take steps to ensure systematic debt restructuring later,” he said. “A blanket bailout is highly unlikely and can result in huge loss for shareholders / lenders. But the government will ensure that apartments already sold are donated and distributed to buyers. “

Hu also pointed to the Chinese government’s recent track record in restructuring giants such as Anbang Insurance, Baoshang Bank, HNA Group and China Huarong Asset Management. “The annual profit of the Chinese banking system is 1.9. [trillion yuan] and 5.4. provision of [trillion yuan], which could have easily absorbed the damage from Evergrande, ”he said.

IMF said: “China has the equipment”

In the case of Evergrande, the real estate developer has a more direct relationship with foreign investors than most of the Chinese economy.

According to investment bank UBS, the company owes around $ 19 billion in offshore bonds in total, which is equivalent to around 9% of Chinese bonds denominated in US dollars. The report states that Evergrande’s total liabilities are around $ 313 billion, or about 6.5% of the total liabilities of the Chinese real estate industry.

UBS analysts expect Evergrande to restructure its debt and expect bond prices to recover from their lows and limit the transition.

Analysts have also determined a range of potential spillover effects if Evergrande enters a less likely scenario of total liquidation, such as bankruptcy of exposed banks and the sale of emerging market debt.

The chief economist of the International Monetary Fund, Gita Gopinath, told Reuters this week that the organization believes that “China has the tools and the political space to prevent this from turning into a systemic crisis.”

The IMF can organize bailouts for countries or regions in financial difficulty.

Even though public statements by the government in recent months have called for avoiding major financial risks, the intervention of Chinese officials has not been granted.

So far, Chinese authorities have made major public statements about Evergrande.

At a press conference last week, a spokesperson for the National Bureau of Statistics said the department was monitoring the struggles of some large real estate companies and the potential impact on the economy.

According to Moody’s estimates, the Chinese real estate market, along with related industries such as construction, accounted for more than a quarter of the national GDP.

Betting real estate prices would only increase, many Chinese families were eventually forced to commit to buying homes. In recent years, the government has tried to cool the market with measures such as restrictions on the level of loan promoters.

– CNBC’s Eustens Huang and Weizen Tan contributed to this report.

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