- Cristina J. Orgaz @cjorgaz
- BBC News World
Until a few days ago it was one of the most valuable real estate companies in the world, but the collapse of the giant Evergrande has placed it on the brink of bankruptcy and has rekindled fears of a Chinese housing bubble.
Many wonder if the case will become the “Lehman Brothers” of the second largest economy in the world.
And it is that China faces a tough decision similar to the one that the United States government had to make in 2008 when it left fall to investment bank Lehman Brothers.
That case began 13 years ago what is known as the Great Financial Crisis.
Now the Chinese government must decide whether keeps one of the country’s leading builders afloat or lets it disappear putting at risk more than 1,300 real estate developments in 280 cities of the country.
The company’s main problem is its large debt, which, among all its financial commitments, amounts to US $ 300,000 million.
It is the most indebted real estate of the world.
In recent years, it has been dedicated to borrowing to finance not only its construction division but many other businesses to which it has been expanding: amusement parks, water bottlers, electric vehicles and even came to buy a soccer team.
Your bankruptcy would put in trouble also to all these divisions, to the 200,000 direct employees and to the more than 3.8 million indirect jobs that it creates per year.
“The collapse of Evergrande would be the biggest test China’s financial system has ever faced in years, ”estimates Mark Williams, chief Asia economist at Capital Economics.
A vicious circle
Evergrande depends to keep running on money that comes to it from pre-sales of apartments under construction, which are usually taught off-plan.
But due to various factors, sales have slowed down and with less income, the company you can’t pay your providers, who stop supplying materials or services.
That makes I can’t finish the houses and therefore cannot raise more cash: it is a vicious cycle.
A statement issued by the company, its managers said its cash flow was under “enormous pressure.”
Some Evergrande projects have already been put on hold while the company puts assets up for sale to generate liquidity and tries to negotiate with its suppliers to delay payments and avoid bankruptcy.
“China has introduced very strict measures to force property developers to reduce balance sheet debt,” explains Fabrice Jacob, CEO of JK Capital, of the La Française group, referring to the measures launched by China to try to control the housing bubble and combat speculation.
Important pillar of the economy
The real estate sector, one of the pillars of Chinese economic growth in recent decades, represents according to the National Statistical Office of China the 7.5% of the country’s gross domestic product.
“This has pushed Evergrande to cut its sales prices on all its projects by 30%, the highest discount it has ever offered,” he adds.
However, all attempts to calm the spirits among your creditors or those who bought a home that you now cannot finish have been to no avail.
In the last days, little demonstrations have taken place in miscellaneous cities Chinese.
More of a million people expect to move to their new homes.
They have paid deposits and could potentially lose that money if bankruptcy occurs.
Contagion fears
Kunjal Gala, manager of Federated Hermes’ international business, says it is impossible to know for sure what would happen if Beijing allowed Evergrande to collapse, uncertainty in the market has been evident.
“The pressure on Beijing to intervene in the case of Evergrande, it grows as the downward spiral of China’s largest real estate developer continues and signs of financial contagion increase ”, estimates the analyst.
“Instead of allowing a chaotic collapse into bankruptcy, Many analysts predict that regulators will engineer a restructuring to keep systemic risk to a minimum. But nothing is certain, ”he says.
At the moment, the benchmark index of the Hong Kong Stock Exchange, the Hang Seng, recorded the Monday 3.3% losses in a day marked by the debacle of the real estate companies infected by the Evergrande case.
And on Tuesday it reopened in the red: with a fall of 1.08%.
Why would it matter if Evergrande collapses?
In addition to the destruction of jobs and thousands of people potentially losing their money for houses that are not going to be built, there are also the companies that do business with Evergrande.
These construction and design companies, or material suppliers, run the risk of significant losses, which could lead them in turn to bankruptcy.
But Domino effect it could go on beyond the Chinese borders.
Some analysts have suggested that the company’s debt problems could represent generalized risks to the financial system of the second largest economy in the world.
There is concern that other property developers who are also heavily in debt may follow suit.
Credit crisis?
As the great credit crisis of 2008 showed, when property developers go bankrupt, the banks and investors who lent them money record losses and end up restricting credit tosmall businesses and individuals.
“The financial consequences would be far reaching. Evergrande reportedly owes money to some 171 national banks and 121 other financial companies, ”Mattie Bekink of the Economist Intelligence Unit (EIU) told the BBC.
If Evergrande goes bankrupt, banks and other lenders may be forced to lend less.
This could lead to what is known as credit crisis, when businesses struggle to get loans at affordable rates.
A credit crunch would be very bad news for the world’s second-largest economy, because companies that cannot obtain loans have difficulty growing and, in some cases, cannot continue to operate.
This can also make foreign investors nervous, that they might see China as a less attractive place to invest.
In fact, some firms have been reducing their exposure to China for some time,
To make that decision, explains Richard Bernstein, CEO of Richard Bernstein Advisors, his firm was based “on the deterioration of the foundationschosen and the best prospects in other parts of the world“.
“Our exposure is now only around 1%. China represents about 4% of the world’s equity markets, ”he explained.
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