The headquarters of the Evergrande Group will be found in Shenzhen, southeastern China, on September 14, 2021. China’s real estate giant said it was facing “unprecedented difficulties,” but denied rumors that it was about to go down.
Noel Celis | AFP | Getty Images
But when it comes to the magnitude of the potential impact on international financial markets, analysts point out the big difference between the Evergrande crisis and the Lehman shock. Evergrande owns the land and Lehman owns the financial assets.
Evergrande has cash flow issues, but talking about systemic risk is “frankly a bit overkill,” said Rob Carnell, ING’s Asia Pacific Research Director, on Wednesday at CNBC’s “Squawbox Asia.. “
“Let’s face it, this is not Lehman’s, this is not LTCMKernel mentioned Long-Term Capital Management, a large American hedge fund that failed in the 1990s, saying, “This is because even hedge funds with large leverage positions have their financial asset prices skyrocketing toward zero. It’s not a bank. It’s a leveraged real estate developer with over $ 300 billion in debt. “
He hopes that if Evergrande can get some cash flow on physical assets, the company can complete development projects, sell them and start paying off debt.
On Wednesday, the company’s real estate group announced that it would pay interest on bonds traded on the mainland denominated in RMB on time.
“Evergrande owns a large land bank but faces a liquidity crisis,” Macquarie Chief China Economist Larry Fu said in a report Tuesday. He said the developer’s assets consist primarily of land and housing projects worth just over 1.4 trillion yuan ($ 220 billion).
NS The collapse of the 2008 Lehman shock “The market has become suspicious of the health of other banks,” Hu said, leading to the collapse of financial derivatives (credit default swaps and collateralized debt obligations).
“But it is very unlikely that the Evergrande Group will plunge land prices,” he said. “After all, the value of land is simply more transparent and stable than financial instruments, especially in China, where local governments dominate the land supply.”
“resulting in, [the] Local governments have strong incentives to stabilize land prices. In the worst-case scenario, local governments could even buy back land, as in 2014-15. “
Another significant difference in the case of Evergrande is the high level of government control and involvement in China’s real estate industry.
“China’s banks and many other entities are first government agencies and second intermediaries,” an analyst at research firm China Beige Book said in a report Monday. “Even non-state finances can be managed to a degree that is rarely seen outside China. Commercial bankruptcy is a national choice.”
“Beijing says it will lend, so you lend it. When you get your money back, or even if it’s secondary,” the report said. “There is no Lehman moment because the Lehman-style epidemic story doesn’t make sense here.”
The legendary US investment bank collapsed 13 years ago this month at the iconic moment of the global financial crisis. Banks undertook tens of billions of dollars worth of securities backed by high-risk mortgages during the US housing bubble. The US government eventually allowed Lehman to fail, but bailed out other financial institutions.
In the case of China, Beijing sought to allow the market to play a larger role in the economy. Make more state-owned enterprise loans default.
Macquarie’s President Hu said the authorities would be patient in the case of Evergrande, as they have two goals: to prevent excessive risk taking and to keep the real estate market stable.
“Policymakers will choose to wait first and then intervene later to ensure an orderly debt restructuring,” he said. “Large bailouts are unlikely and shareholders / lenders can suffer significant losses, but the government confirms that pre-sold apartments will be completed and delivered to homebuyers. . “
Hu also pointed out the recent achievements of the Chinese government in the restructuring of giants such as Anbang Insurance, Bank of Commerce and HNA Group. China Huarong Asset Management.. “The annual profit of China’s banking system is 1.9. [trillion yuan] And 5.4 provisions [trillion yuan], The loss from the evergrande can be easily absorbed. “
In the case of Evergrande, the real estate developer More direct connection with foreign investors Than most of the Chinese economy.
According to investment bank UBS, the company’s offshore bond issuance is approximately $ 19 billion, or about 9% of US dollar-denominated Chinese bonds. According to the report, Evergrande’s total debt is about $ 313 billion, about 6.5% of China’s real estate sector’s total debt.
UBS analysts expect Evergrande to restructure its debt and predict that bond prices will recover from lows and limit infections.
Analysts also showed the extent of the spillover effect that Evergrande could have if it entered a scenario where it was unlikely to be fully liquidated, such as an exposed bank bankruptcy or an emerging market credit-wide sale.
Gita Gopinato, Chief Economist of the International Monetary Fund, told Reuters this week that the organization is “China has the tools and policy space to prevent this from turning into a systematic crisis.”
NS The IMF can organize national bailouts Or areas with financial stress.
The government statement in recent months Called for prevention of major economic risks, No intervention by Chinese authorities has been given.
Chinese officials have so far issued several major official statements about the Evergrande Group.
At a press conference last week, a spokesman for the National Bureau of Statistics said Monitor the difficulties of some major 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 GDP.
The bet that real estate prices would only rise eventually forced many Chinese households to take out mortgages to buy homes. Over the past few years, the government has sought to cool the market with measures such as limiting the level of debt that developers can undertake.
— CNBC’s Eustance Huang and Weizhen Tan contributed to this report.
This is why the Evergrande crisis is not China’s “Lehman Moment.”
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