A threat named Evergrande

Evergrande, a Chinese real estate juggernaut with US $ 300 billion in debt, is in peril and threatens to shake up the economy beyond the borders of the Middle Kingdom. On Monday, the stock markets sank into the red, worried about the fate of the Chinese conglomerate and its potential repercussions.

Founded in 1996, Evergrande Real Estate Group is the second largest real estate developer in China. The Evergrande conglomerate, which is also present in other fields such as electric vehicles or tourism, currently employs more than 200,000 people. In all, nearly 3.8 million people depend directly on the company.

Not only does the company own more than 1,300 real estate projects in nearly 280 cities in China, but it also has assets in Europe and North America – notably the luxurious Chateau Montebello complex in western Quebec. , halfway between Montreal and Ottawa.

For several years, however, Evergrande has been in debt and bankruptcy now threatens the company. On Monday, its stock lost 8% of its value to close at 2,280 Hong Kong dollars. Over the past year, it has fallen by 86.01%.

“The collapse of Evergrande would be the biggest test the Chinese financial system has faced in years,” said Mark Williams, chief economist for Asia at Capital Economics group, in a note published at the beginning of September. According to the analyst, if fears intensify in the markets, “the PBOC [Banque populaire de Chine] could intervene with liquidity support ”.

However, despite the parallels some draw with the collapse of investment bank Lehman Brothers leading to the 2008 financial crisis, “a default or bankruptcy of CEG [China Evergrande Group] does not constitute a Lehman-type threat for China, but it is still bad news for the economy, ”said Art Woo, an economist at the Bank of Montreal. “This will be an additional brake on the economic recovery of the country, which suffers from new epidemics of COVID-19 in recent times,” he explains.

Global fallout?

In North American markets, investor concern was palpable on Monday. “There was already a bit of a pessimistic feeling in the markets, and this trigger came to justify the sales transactions in the market,” observes Cimon Plante, portfolio manager and senior vice-president at Groupe Plante Financial Banque Nationale.

“The situation will create some volatility, but I believe that the contagion will remain rather limited within China itself”, believes the analyst.

According to Mr. Plante, the stock markets could remain in the red for some time to come. “I wouldn’t be surprised if China let things drag on a bit to make Evergrande an example, because it’s been a long time since there are too many inventories and the government mentions that there is too much debt. among promoters, ”he adds.

“In my opinion, investors who have the stock in the company are going to lose their money. I think those who own the debt will absorb some impact. But at some point, the Chinese government is going to have to intervene. They cannot let this go on indefinitely, ”concludes Mr. Plante.

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