Evergrande’s collapse would have ‘profound consequences’ for China’s economy

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Investors are bracing for the increasing risk that Chinese real estate colossus Evergrande will collapse under the weight of more than $300 billion of debt. But experts say the Chinese Communist Party will have no choice but to save a company that is so emblematic of its economic growth model – and whose collapse would send shockwaves across the global economy.

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Western financial institutions think Evergrande has a bleak future, if it has one at all.
JP Morgan made a whopping cut to its stock price target for the business on Friday, to 2.80 Hong Kong dollars from $HK7.20.
This came after ratings agency Fitch downgraded the firm's foreign currency credit rating from triple C plus to double C on Wednesday, saying that a form of default “looks probable”. Ratings agency Moody’s lowered Evergrande’s credit rating in the third time in three months – on the grounds that its creditors faced “weak recovery prospects” if the company defaulted.
Evergrande is the world’s most indebted real estate developer; $300 billion is roughly equivalent to the entire public debt of Portugal. Unsurprisingly, senior executives admitted in August that they might be unable to meet all of their financial obligations.

‘Debt-dependent growth model’
This poses a serious problem for the Chinese Communist Party, as Evergrande is a longstanding symbol of the country’s very economically productive urbanisation.
Also, Evergrande’s business model is representative of “China’s highly debt-dependent growth model”, Jean-François Dufour, head of French, China-focused consulting firm DCA Chine-Analyse, told FRANCE 24.
The company was founded in 1996, in the midst of the Communist Party’s Herculean endeavour of moving hundreds of millions of Chinese people from the countryside to the cities, creating a "very strong growth of the Chinese real estate sector", Frédéric Rollin, an investment strategy adviser at the multinational firm Pictet Asset Management, told FRANCE 24.
Evergrande was the main beneficiary of this boom. It pursued a very aggressive growth strategy and was dependent on banks’ goodwill as it accumulated a proliferating portfolio of real estate projects at a rapid clip.
This expansion continued over the decades, as shown by Evergrande raising $722 million in its IPO on the Hong Kong Stock Exchange in 2009. The firm now controls 778 real estate projects in 223 Chinese cities, directly employing nearly 200,000 people. Evergrande has claimed that it has indirectly created more than three million jobs.
Huge debt pile
But at the beginning of the 2010s, in the wake of that blockbuster IPO, Evergrande stretched its tentacles into an array of other sectors. The company was in a “race against time to diversify its activities, much more so than other Chinese real estate groups”, Dufour said. The Communist Party had “made other sectors national priorities”, he continued.
Consequently, Evergrande acquired stakes in video streaming companies, health insurers, milk farmers and pig-breeding co-operatives. It also bought Guangzhou FC, a football club in the Guangdong region where it is based, and built amusement parks. Evergrande’s latest diversification project was an attempt in 2019 to start manufacturing electric cars – despite a lack of any experience in this field.
Evergrande got its fingers into so many pies because it wanted a presence in “a sufficient number of priority sectors so that the state would be more inclined to support it financially when the weight of its debt became too heavy to bear”, Dufour explained.
The debt is very heavy indeed. Evergrande is due to pay $15 billion to creditors by the end of 2021; but, as of late June, it had only $13 billion to its name. At the same time, the banks have become much more reluctant to lend it money. “It’s become more complicated because of the restrictive monetary policy the government is currently pursuing,” Rollin said.
Economic contagion risk
Evergrande has entered a downward spiral in which the banks no longer want to give it the funds to finish its real estate projects, depriving the company of new properties to sell and therefore of fresh funds to repay creditors and reassure the banks.
“In a normal market economy, Evergrande would have gone bankrupt a long time ago,” Dufour said. But the Chinese model of capitalism has long encouraged the model of private debt.
“The rule was that as long as a company looked like it was moving forward – with plenty of projects in the pipeline – the banks gave it credit on the understanding that the strength of Chinese economic growth would always deliver profits,” he continued.
This way of thinking meant that “in 2020, Chinese companies’ debt represented 160 percent of GDP, compared to just 85 percent in the US and 115 percent in the eurozone”, Rollin pointed out.
Companies like Evergrande find themselves in a tricky situation now that Beijing has pushed heavily indebted countries to deleverage over the past year.
But the Communist Party also faces a dilemma, as it needs to prevent Evergrande from going under, to avoid the “profound consequences it would have for the Chinese economy”, Dufour said.
If Evergrande went bankrupt, “at least one bank would go under”, Dufour continued. “That may well push other banks to be more reluctant to end to highly leveraged countries – and that would herald the end of China’s debt-fuelled growth model.”
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The real estate behemoth’s collapse would sent shockwaves far beyond China. As the Financial Times noted: “Evergrande counts big international companies among its investors, including Allianz, Ashmore and BlackRock. A default is likely to have spillover effects on global markets, where many investors have historically anticipated Chinese government support at times of distress.”
Given Evergrande’s importance to the Chinese economy, “it’s highly probable that the state will sort out a debt restructuring programme for it”, Rollin said. In other words, Beijing will force creditors’ hands while organising the sale of Evergrande’s non-core assets.
“This will likely mean putting the company under the state’s control while it finds a buyer; an approach the Chinese government has adopted before,” Dufour said.
But cleaning up a mess as big as a $300 billion debt pile will not happen overnight.

CN economy is in big trouble under trade war, for now, XI just try to make CN still look "cool", but their economy is falling fast.
 

VivaVietnamm

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Bulky but fragile: Only one Chinese real estate giant goes bankrupt, the whole economy shakes
CommentLe Minh - Moc Tra • 16:01, 13/09/21
Help NTDVN fix the error

Every once in a while, a few companies grow so big and so messy that governments fear what will happen to that economy if it fails. In China, Evergrande - the notorious real estate giant - is just such a company.

Evergrande is known as the world's most indebted property developer, and the state has been giving it "oxygen" for months. The flood of bad news regarding Evergrande in recent weeks has led many experts to warn of the inevitable: failure.



Ratings agency Fitch this week said that Evergrande's insolvency "is likely to happen". Moody's, another rating agency, said Evergrande was running out of money and time. Evergrande is facing more than $300 billion in debt, hundreds of unfinished residential buildings and thousands of angry suppliers who have closed construction sites. The company has even started paying past due bills by handing over unfinished assets.

Observers are watching to see if Chinese regulators live up to their pledge to clean up the country's corporate sector by letting "debt bombs" like Evergrande fall.

How did Evergrande become such a 'debt bomb'?
In its glory days a decade ago, in addition to its main business of real estate, Evergrande also ran a bottled water business, owned the best professional football team in China, and even had a short time with " yard stone" to the field of pig farming. It became cumbersome and messy, with investments so spread out that it bought an entire electric car manufacturing unit, only to be delayed mass production.

Today, Evergrande is seen as a "loophole" that could threaten to burst the "great dyke" - China's largest banking system.

This company founded in 1996 fueled the real estate boom in China. This process has urbanized large swaths of the country and has resulted in households having to put together nearly three-quarters of their assets to pay for housing costs. As a result, Evergrande has become the center of power in an economy that relies on the real estate market for rapid economic growth.

Evergrande's billionaire founder, Xu Jiayin, is a member of the Chinese People's Political Consultative Conference, an elite group of well-connected advisers. Mr. Xu's relationship probably gave creditors the confidence to continue lending to Evergrande as the company grew and expanded into new areas of business. However, in the end, Evergrande has entered the debt spiral created by itself, so large that the government wants to save it, it has to be wary.

Xu Jiayin, billionaire founder of Evergrande, in 2009. These days the company has nearly 800 unfinished projects across China. (Image: Getty)
Xu Jiayin, billionaire founder of Evergrande, in 2009. These days the company has nearly 800 unfinished projects across China. (Image: Getty)
In recent years, the company has faced lawsuits from homebuyers who are still waiting to finalize apartments for which they have partially paid. The amount of money involved in lawsuits reaches hundreds of billions of dollars. Some places have suspended construction of Evergrande's projects.

Why is this company having so many problems at the same time?
There are 2 reasons:

First, Chinese regulators are cracking down on property developers' reckless borrowing habits. This forced Evergrande to begin selling off a piece of its vast business empire. The company is considering selling its electric vehicle business and is already in talks with potential buyers. But some experts say buyers are waiting for the sell-off.

Second, China's real estate market is slowing down and the demand for new apartments is also less. This week, the National Institute of Finance and Development, a prominent Beijing think-tank, declared the property boom "shows signs of turning point," citing weak demand and weak data. whether sales slow down.



Most of Evergrande's money comes from unfinished pre-sale apartments. According to research from REDD Intelligence, Evergrande has nearly 800 unfinished projects across China and around 1.2 million people are still waiting to move into their new homes.

Evergrande has slashed the price of new apartments but even that hasn't attracted new buyers. In August, the company's revenue was only three-quarters of the same period in the same period.

Chinese real estate is inherently a high-risk industry. The existence of this market is no longer an economic task, but also a political one. The market is always associated with 3 groups of objects:

Local governments rely on land sales for revenue;
Business investors rely on loans;
Home and real estate buyers rely on mortgage loans.
All three of these groups have to rely on state-owned commercial banks - where the real boss is the CCP government.


Since the 20th century, more than 100 economic crises have occurred and most of them are caused by the real estate bubble. Recent examples are the real estate crises in Japan, the US and Spain.



The CCP created the largest real estate bubble in modern world history, which would have burst a long time ago if it had happened in another country.

The CCP is trying to control the economy. However, they are also in the dilemma of not being able to risk the bubble burst, nor let it grow larger. All the regulatory policies that the CCP has introduced in recent years have one goal of "letting the bubble slowly shrink".

Most property owners do not want housing prices to fall; when 70% of the wealth of Chinese people is real estate. If housing prices fall, their total property value will decrease and of course they don't want that to happen. Even for those who have paid off their home loan or are still paying. Therefore, both the Chinese government and people expect housing prices to remain relatively stable.

Consumption spending of Chinese people is expected to increase, shifting spending from buying houses to other types of goods, services, investment, manufacturing... if the real estate bubble bursts. But this assumption is unrealistic for a country like China.

According to statistics from the Central Bank of China, the average debt of a young man born after 1990 is 127,000 yuan ($18,826). Meanwhile, 560 million Chinese have no savings in 2019. Therefore, even a bubble burst will not spur consumption, because of the following factors:

Homebuyers with a mortgage will still have to keep paying off their debt;

The bursting of the real estate bubble will cause widespread unemployment in more than 50 industries.
Therefore, the consequences of the bursting of the real estate bubble are a nightmare for the government, banking system, businesses and the majority of Chinese people. The severity of the consequences also depends on the "tension" of the bubble before it burst. Evergrande Corporation to the CCP is no longer just a threat, but a race against time.

 

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Investors are bracing for the increasing risk that Chinese real estate colossus Evergrande will collapse under the weight of more than $300 billion of debt. But experts say the Chinese Communist Party will have no choice but to save a company that is so emblematic of its economic growth model – and whose collapse would send shockwaves across the global economy.

ADVERTISING

Western financial institutions think Evergrande has a bleak future, if it has one at all.
JP Morgan made a whopping cut to its stock price target for the business on Friday, to 2.80 Hong Kong dollars from $HK7.20.
This came after ratings agency Fitch downgraded the firm's foreign currency credit rating from triple C plus to double C on Wednesday, saying that a form of default “looks probable”. Ratings agency Moody’s lowered Evergrande’s credit rating in the third time in three months – on the grounds that its creditors faced “weak recovery prospects” if the company defaulted.
Evergrande is the world’s most indebted real estate developer; $300 billion is roughly equivalent to the entire public debt of Portugal. Unsurprisingly, senior executives admitted in August that they might be unable to meet all of their financial obligations.

‘Debt-dependent growth model’
This poses a serious problem for the Chinese Communist Party, as Evergrande is a longstanding symbol of the country’s very economically productive urbanisation.
Also, Evergrande’s business model is representative of “China’s highly debt-dependent growth model”, Jean-François Dufour, head of French, China-focused consulting firm DCA Chine-Analyse, told FRANCE 24.
The company was founded in 1996, in the midst of the Communist Party’s Herculean endeavour of moving hundreds of millions of Chinese people from the countryside to the cities, creating a "very strong growth of the Chinese real estate sector", Frédéric Rollin, an investment strategy adviser at the multinational firm Pictet Asset Management, told FRANCE 24.
Evergrande was the main beneficiary of this boom. It pursued a very aggressive growth strategy and was dependent on banks’ goodwill as it accumulated a proliferating portfolio of real estate projects at a rapid clip.
This expansion continued over the decades, as shown by Evergrande raising $722 million in its IPO on the Hong Kong Stock Exchange in 2009. The firm now controls 778 real estate projects in 223 Chinese cities, directly employing nearly 200,000 people. Evergrande has claimed that it has indirectly created more than three million jobs.
Huge debt pile
But at the beginning of the 2010s, in the wake of that blockbuster IPO, Evergrande stretched its tentacles into an array of other sectors. The company was in a “race against time to diversify its activities, much more so than other Chinese real estate groups”, Dufour said. The Communist Party had “made other sectors national priorities”, he continued.
Consequently, Evergrande acquired stakes in video streaming companies, health insurers, milk farmers and pig-breeding co-operatives. It also bought Guangzhou FC, a football club in the Guangdong region where it is based, and built amusement parks. Evergrande’s latest diversification project was an attempt in 2019 to start manufacturing electric cars – despite a lack of any experience in this field.
Evergrande got its fingers into so many pies because it wanted a presence in “a sufficient number of priority sectors so that the state would be more inclined to support it financially when the weight of its debt became too heavy to bear”, Dufour explained.
The debt is very heavy indeed. Evergrande is due to pay $15 billion to creditors by the end of 2021; but, as of late June, it had only $13 billion to its name. At the same time, the banks have become much more reluctant to lend it money. “It’s become more complicated because of the restrictive monetary policy the government is currently pursuing,” Rollin said.
Economic contagion risk
Evergrande has entered a downward spiral in which the banks no longer want to give it the funds to finish its real estate projects, depriving the company of new properties to sell and therefore of fresh funds to repay creditors and reassure the banks.
“In a normal market economy, Evergrande would have gone bankrupt a long time ago,” Dufour said. But the Chinese model of capitalism has long encouraged the model of private debt.
“The rule was that as long as a company looked like it was moving forward – with plenty of projects in the pipeline – the banks gave it credit on the understanding that the strength of Chinese economic growth would always deliver profits,” he continued.
This way of thinking meant that “in 2020, Chinese companies’ debt represented 160 percent of GDP, compared to just 85 percent in the US and 115 percent in the eurozone”, Rollin pointed out.
Companies like Evergrande find themselves in a tricky situation now that Beijing has pushed heavily indebted countries to deleverage over the past year.
But the Communist Party also faces a dilemma, as it needs to prevent Evergrande from going under, to avoid the “profound consequences it would have for the Chinese economy”, Dufour said.
If Evergrande went bankrupt, “at least one bank would go under”, Dufour continued. “That may well push other banks to be more reluctant to end to highly leveraged countries – and that would herald the end of China’s debt-fuelled growth model.”
Daily newsletterReceive essential international news every morning
Subscribe
The real estate behemoth’s collapse would sent shockwaves far beyond China. As the Financial Times noted: “Evergrande counts big international companies among its investors, including Allianz, Ashmore and BlackRock. A default is likely to have spillover effects on global markets, where many investors have historically anticipated Chinese government support at times of distress.”
Given Evergrande’s importance to the Chinese economy, “it’s highly probable that the state will sort out a debt restructuring programme for it”, Rollin said. In other words, Beijing will force creditors’ hands while organising the sale of Evergrande’s non-core assets.
“This will likely mean putting the company under the state’s control while it finds a buyer; an approach the Chinese government has adopted before,” Dufour said.
But cleaning up a mess as big as a $300 billion debt pile will not happen overnight.

CN economy is in big trouble under trade war, for now, XI just try to make CN still look "cool", but their economy is falling fast.
 

aragonishere

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This can be Lehman Brother moment for China . It can cause global meltdown in Stock Market. CCP has started clean up as per their common prosperity program.
 

Haldilal

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Ya'll Nibbiars Do you understand the Evergrande issue in China?. I had written about runaway debt in China, and that the country was overleveraged on all fronts corporate, retail, and government. I.e. every segment in the country has borrwed, and borrowed a lot. IIRC at that time. I had mentioned in the thread, that China accounted for 15% of ALL global debt. The relevant thread can be read about here.

So what about Evergrande EG?. EG is China's 2nd largest real estate company, and as per recent reports it has a debt of US$305bn. To put this in perspective, India's total non-food credit is US$1457bn June 2021. So this one company has over 20% of all this. China has seen a difficult local economy for sometime now, as I have often highlighted in my tweets over the past 3 years. What perhaps was one of the last straws for Evergrande was the "three red lines" limit that the Chinese govt imposed on realty players in 2020.

What were the 3 red lines?.

1 . Liability/ Asset must be <= 70%.

2 . Net debt/ Shareholders funds <=100%

3 . Cash balance/ short term borrowings <=100% By this time I guess EG was already quite leveraged and thus to meet these levels tried to sell off assets.

Note by 2020 EG had diversified to other areas such as electric vehicles, football teams, mineral water etc. What particularly damages EG is that the Chinese government is focused on controlling property prices. This hurts individuals who have bought properties. on mortgage loans, because the value of their investment falls, sometimes even below what they originally invested. This spills over to realty companies as people start selling their houses and demand for new houses is low in an already price constrained environ. Now this poses a systemic threat to China, because crisis in real estate often spills over to the financial markets same happened in USA in 2007-2009, didn't it?. It is now reported that 128 banking institutions and 121 non banking ones are exposed to EG. How will it play out? I don't know yet. EG can either be bailed out by the government. or it can declare bankruptcy, or it can be broken into smaller pieces and bought out, or some combination of the above.

EG has a few interest payments amounting to about US$100m coming up over the next 10-12 days. It is widely believed that they will not be able to make the payment. Though they do have 30 days to make the payment. EG bonds account for 11% of all Asian High Yield debt, and A default here, can spook the debt markets. Contagion usually takes time. Remember the 2005-2007 US mortgage crisis did not hit India till mid-2008. The Chinese government can prevent a global crisis by bailing out EG, but seeing their recent moves, I am unsure that they will.
 
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Haldilal

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This can be Lehman Brother moment for China . It can cause global meltdown in Stock Market. CCP has started clean up as per their common prosperity program.
Ya'll Nibbiars My own interpretation of things is that the Chinese government will not bail out EG but might help homeowners so that stalled projects are completed. The real contagion will be on how this will playout. As I have stated, RE accounts for 20-30% of GDP. RE will definitely slowdown if EG goes bankrupt. If the second largest Property developer isn't able to finish then will the average Chinese trust others?. This will result in more pain, slower price increases and more importantly slower land sales. Slower land sales mean lower revenues to Local government. Commodities which are consumed by RE will be hit. There will be stagnation of growth for couple of years. The only way out for China is to trade time for space. Hence keeping Property prices stable for a decade. So the best case scenario is flow muted RE and its secondary effect.
 

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Evergrande and the end of the growth model that created the "Chinese economic miracle": Will GDP growth drop to only 1-2% in the next decade?
September 24, 2021 - 08:44 AM |


Looking at the crisis at the real estate group that was once the world's largest market capitalization two years ago, it is possible to recognize huge gaps in the growth model of the Chinese economy.

Revealed "heavyweight" candidates in the poll of the ugliest buildings in China
Revealed "heavyweight" candidates in the poll of the ugliest buildings in China
This past August, a dramatic video was recorded in the city of Kunming that showed the enormous scale of China's real estate bubble. In less than a minute, the 15-storey apartment building collapsed after 85,000 controlled explosions.

The building, which is still under construction, is located in a complex called Sunshine City II and has become a "ghost building" since 2013 after the company behind it ran out of money. "Finally, the scar that has existed for nearly 10 years in the heart of the city will heal," wrote an article in the Kunming Daily.

Such scars are common in China, where Evergrande - the world's most indebted real estate group - is running out of liquidity. Looking at the crisis at the real estate group that was once the world's largest market capitalization two years ago, it is possible to recognize huge gaps in the growth model of the Chinese economy.

The dramatic developments on Evergrande's path to collapse are just the tip of the iceberg. Contributing 29% of GDP, China's real estate industry has fallen into such a severe oversupply that from its position as the largest engine of the economy, it is now at risk of becoming a burden. heavy.

In China, ghost projects can be enough to accommodate up to 90 million people, according to Logan Wright, head of consulting firm Rhodium. To make it easy to imagine, in the G7 group, there are 5 countries that are France, Germany, Italy, the UK and Canada that can let the entire population live in these abandoned apartments and still have plenty of space.

The average Chinese household has more than 3 people. "We estimate the total number of unsold apartments is about 3 billion square meters, enough to accommodate 30 million households," Wright said.

The oversupply situation has existed for many years now. But from last year China began to recognize this as a chronic disease and need to be thoroughly dealt with. President Xi Jinping has lost patience with the overabundance of the property market and outlined "three red lines" to reduce the industry's debt. Evergrande is becoming the first criminal.


Evergrande and the end of the growth model that created China's economic miracle: Will GDP growth drop to just 1-2% in the next decade? - Photo 1.
The Evergrande case raises an important question for the world's second-largest economy: is the growth model based on the real estate sector - also the most powerful engine of the global economy? – no longer effective?

The answer is yes, according to Leland Miller, CEO of the reporting consulting firm China Beige Book. "Beijing is more concerned about China's growth momentum than anyone in the West. It realizes that the old model of focusing on building as much as possible is no longer working, or will even deliver. China needs to change its growth model immediately," Miller said.

Ting Lu, chief economist at Nomura Bank, predicts that Evergrande's "debt bomb" won't cause the economy to collapse, but Beijing's push to change its growth model will certainly put more pressure on the economy. GDP growth in the coming years.

Wright agrees that it will be difficult for China's economy to grow past 4% over the next decade. According to Miller, it wouldn't be surprising if the number was just 1-2%.

If these predictions come true, the Chinese economic miracle will disappear. In the 10 years from 2000 to 2009, China's GDP grew at an average of 10.4% per year. The number dropped between 2010 and 2019, but still averaged 7.68% per year.

The whole world will feel this drop very clearly. China has long been the biggest engine of global prosperity, contributing to 28% of the world's GDP growth between 2013 and 2018, more than double the share of the US by 1. IMF research.

"Even if China avoids a severe and sudden crisis, the medium-term outlook is much worse than we thought," said Jonas Goltermann, an analyst at research firm Capital Economics. .

Crossing Xi's "red line"


After the earthquake, global financial markets have rebounded. But what makes the Evergrande case going to have long-term effects is the plunge in the Chinese property market. In the first half of September, sales in 52 major cities fell 16% year-on-year, after falling 20% in August.

More notably, in the first 12 days of September, local governments' land revenues fell by as much as 90%. This revenue accounts for one-third of local budget revenues, and is used to pay principal and interest on the bonds they issue. In total, China's provinces and cities owe about $8.4 trillion, mobilized through thousands of Local Government Financing Vehicles (LGFVs). LGFVs have long been seen as underground "batteries" that power the entire economy, raising capital through bond issues and then funding infrastructure projects. giant floor.

With fixed asset investment (last year reaching 8 trillion USD) contributing 43% of GDP, it is clear that if localities have reduced ability to mobilize capital to finance infrastructure projects, the growth momentum of China's economy will shrink seriously.

On the offshore USD bond market, where bonds issued by hundreds of Chinese real estate companies are being traded with a total value of about $221 billion, most are being priced at junk. "About 16% are yielding more than 30%, 11% are yielding more than 50%." A yield of more than 50% means that investors think the company is likely to default.

Some say China will face a "Lehman moment" with shocks similar to those experienced by US and global stock markets when investment bank Lehman Brothers collapsed 13 years ago. However, given the influence of the Chinese government on the financial system, Beijing could easily ask banks to bail out Evergrande to prevent systemic risk.

More important are the three "red lines" that Mr. Xi outlined last year to keep the debt ratio of the real estate sector in check. Specifically, the liabilities/assets ratio must be below 70%, the net debt/equity ratio must be below 100%, and the cash and cash equivalents/short-term liabilities ratio must be at least 100 percent. %. As of June, Evergrande had breached all three of these lines and thus blocked funding channels and created the last crisis.

Evergrande and the end of the growth model that created China's economic miracle: Will GDP growth drop to just 1-2% in the next decade? - Photo 2.
The cash flow of China's listed real estate companies shows that they are facing liquidity shortage. Source: FT.

Many difficulties

The current situation forces Chinese policymakers to admit that real estate is no longer a reliable engine for sustainable growth. Not only because in 2017 Mr. Xi famously said that "home is a place to live, not to speculate", but because housing demand has changed a lot compared to the past. The economic reform of the late 1990s created the biggest real estate boom in human history.

In 2020, only 12 million children will be born in the country of billions, down from 14.65 million a year earlier. This is a trend that will continue over the next decade as the number of women between the ages of 22 and 35 is forecast to decline by more than 30%. Some experts predict China's population will shrink, further reducing housing demand.

After three decades of seeing hundreds of millions of people flee the countryside to the cities, China is showing the opposite trend. About 75% of cities are experiencing population decline, according to Houze Song, an analyst at think-tank MacroPolo.

China is facing a risky transition. It is moving from a model that relies heavily on real estate to other engines such as high-tech manufacturing and green technology, according to analysts. Among the top eight priorities listed in the five-year plan China announced late last year, the country vowed to eliminate real estate speculation and instead direct capital flows to technology innovation. and pursue carbon neutrality.

These changes will take several years and will result in a more sustainable economy. However, in the immediate future, many people's lives are being disturbed because of debt lords like Evergrande.

 

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Ya'll Nibbiars My own interpretation of things is that the Chinese government will not bail out EG but might help homeowners so that stalled projects are completed. The real contagion will be on how this will playout. As I have stated, RE accounts for 20-30% of GDP. RE will definitely slowdown if EG goes bankrupt. If the second largest Property developer isn't able to finish then will the average Chinese trust others?. This will result in more pain, slower price increases and more importantly slower land sales. Slower land sales mean lower revenues to Local government. Commodities which are consumed by RE will be hit. There will be stagnation of growth for couple of years. The only way out for China is to trade time for space. Hence keeping Property prices stable for a decade. So the best case scenario is flow muted RE and its secondary effect.
I also mentioned multiple times that the Civil and Infra accounted for over one third of Chinese GDP growth.
Chinese govt was handing out loads of money and Infra companies rushed to take the money and created a influx of cheap Flats in the markets.
There is 3 times more flats than people in China now. People bought flats because they should have extra home.
But now people are not moving in those houses, tier-2 and 3 cities are not growing anymore. There are no more buyers left in the market and still millions of flats are remaining to be sold.
 

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'I have nothing left to live for': Evergrande meeting descends into chaos as investor pulls knife and threatens to kill herself

Bryan Ke
Sat, October 2, 2021, 12:44 AM·2 min read


A compilation video that shows desperate investors confronting Evergrande staff amid the company’s financial issues has gone viral on Chinese social media platform Weibo.

The confrontation:
The 10-minute-long video was published on Sept. 29 to Weibo by local news site Xing Tai Shen Bian Shi, who did not specify when and where the videos were taken, according toInsider.



  • In one of the videos, a female investor can be seen brandishing a knife and threatening to kill herself in front of the Evergrande Wealth staff and other people inside a meeting room.
  • “I don't want the interest on my investment, I just want my money back. So here's what I have to say to you. If Evergrande Wealth doesn't give me my money today, I'll kill myself right here,” she told the staff. “If this isn't handled today, I'll die right here, right in front of you. My retirement savings are all in that investment. I have nothing left to live for."
  • Another clip showed a group of people trying to block a car outside the company’s building. A woman can be heard crying and demanding an explanation in the video.
  • “I don't have any choice but to do this, and I won't listen to you," she said. “All my money is gone."
  • Investors have been protesting outside Evergrande since Sept. 13, according to Reuters. At one point, around 100 people had gathered outside the building, prompting the guards to form a human barricade to prevent them from getting inside.

The downfall of an empire: China Evergrande Group has become the world’s most indebted company after its liabilities piled up to more than $300 billion from years of borrowing. The financial crisis has also spilled over to the company’s wealth management arm, Evergrande Wealth.
  • The Evergrande crisis has affected the global market and the crypto world, according to TRT World. The prices of Bitcoin and Etherium have reportedly dropped to their lowest since August, while traditional stocks on Wall Street, such as those in the S&P 500 and Nasdaq, suffered their biggest daily percentage drop since May.
 

VivaVietnamm

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The real estate crisis will cause China's economic growth model to collapse
03-10-2021 - 10:29 AM | International Finance

In the event that the real estate market is adjusted, local governments, household finance to China's growth model will face many difficulties.
Real estate - the main engine of China's growth "engine"

Once an important driving force of the Chinese economy, the real estate sector now faces many major hurdles. Currently, some developers have offered up to 30% off prices with the aim of bringing in revenue, to overcome the difficulties they are facing.

Officials are concerned that the drop in prices could affect the psychology of home buyers and lead to protests or "distortion" of the real estate market. Therefore, Beijing has capped the reduction. For example, in Yueyang city, the government requires developers to stop raising house prices but not to reduce prices by more than 15%.

In such cases, both regulators and developers have to trade-off between extremely high prices and a devastating recession. The real estate market seems to be the only big driver of the country's economy. Groups of people living in urban areas have flocked to this market, calling it "paradise".

Housing prices in China have skyrocketed over the past 15 years, often staying more than 10% a year in major cities. However, developers borrowed heavily during that time. According to Morgan Stanley, the total debt of China's real estate industry is 18.4 trillion yuan ($2.8 trillion, or 18% of GDP). Housing prices relative to income are currently making cities in China some of the most expensive in the world.

Economist: The real estate crisis will cause China's economic growth model to collapse - Photo 1.
Revenue from the sale of public land (unit: % of GDP).

However, this trend is facing a major obstacle: Beijing's goal of reducing debt and inequality. The "common prosperity" campaign launched by President Xi Jinping has restricted the access to loans of some large real estate groups. The case that has attracted the most attention in recent times is Evergrande, which has about 300 billion USD in debt.

The concern for Beijing is not limited to the fact that if the sector falls into crisis, the financial system is also at great risk. In the event that the real estate market is adjusted, local governments, household finances to China's growth model will face many difficulties.

China's leaders have enthusiastically backed the real estate boom of the past 30 years. When the country's tax system was reformed in 1994, the local government lost a large source of revenue and was unable to issue bonds.

However, they are tasked with achieving high economic growth targets, sometimes more than 10% per year. As a result, selling land has become a major driving force, from which funds are available to finance road and other public works projects. They are also allowed to set up companies that can borrow from banks and other sources. Accordingly, the economy is closely tied to the development of the real estate sector.

From 1999 to 2007, the amount of rural land converted into urban projects increased by an average annual rate of nearly 23%, and revenue from the sale of publicly owned land also increased by an average of 31% per year. Not long after, the real estate market became the main "lever" to support economic growth.

During the global financial crisis, much of China's $586 billion stimulus package came in the form of loans and capital from "underground" banks to developers. Kevin Lai - Daiwa Capita's expert; Markets, said: "The real estate market is a vehicle to deliver stimulus. By 2010, land sales accounted for more than 70% of the city's revenue each year, although the proportion in regions was different

The fact that China has not yet come out of this "vortex" has created holes for the economy in recent decades. The relationship between the real estate market and overall growth remains very strong.

According to estimates by Kenneth Rogoff - an expert from Harvard University and Yuanchen Yang - an expert from Tsinghua University, investment in residential real estate projects alone accounts for 15% of GDP, this rate increases. 29% when including construction and related industries. As a result, homebuyers and developers alike think the sector is too big to fail. They consider their investments "only profit, not loss".


The main motivation is falling for the goal of "common prosperity"

Still, the Evergrande crisis and some real estate indexes are starting to show signs of risk, threatening that view. The sharp drop in prices of real estate projects can be the subject of many media coverage, but only companies with a lack of money use this measure.

Demand for real estate is waning. Investors are also withdrawing capital in the secondary market. According to Rhodium, in Shenzhen - one of the most expensive cities in China, the volume of real estate transactions has decreased for four consecutive months, to 2,423 in August. Meanwhile, the average level The monthly average in 2020 is 8,376.

Credits that fuel the construction boom are being tightened. Cedric Lai from Moody's said that access to bank loans and black credit, as well as demand for domestic and foreign bonds, is generally weakening for the whole industry.

For the first time in at least a decade, overseas issuance of USD bonds has become gloomier. Land sales for residential projects also declined in the first half of the year, mainly due to a government request to restrict banks from lending to property developers. According to Moody's, the outlook for bonds in China's real estate sector is currently negative.

Declining demand for housing and a lack of capital means demand for land is also falling. The growth of the local bond market over the past decade has made some areas less dependent on land sales.

However, most local governments have not changed. Total government land sales have increased since 2015 and will reach about 8.3% of GDP by 2020. Therefore, the decline should be a warning sign for the economies of small cities. than.

Meanwhile, real estate also accounts for a large proportion of the assets of households. In 2019, housing accounted for about 60% of their total assets, pushing mortgage debt up to about 76% of total household debt. When developers can't access the usual sources of capital, they depend on selling their homes before completion.

According to Natixis, from 2015 to July 2021, the share of developers' pre-completion home sales increased from 39% to 54% of capital. For Evergrande, buyers also pay up front to pick up a home or purchase one of their property management (WMP) products.

Investors are waiting for the government's move. Some expect that, when the outlook is more pessimistic, officials will ease monetary policy. Zhang Zhiwei, from Pinpoint Asset Management, said most banks have used up their loan quotas for the real estate sector this year.

Raymond Yeung, an expert at ANZ, said that Chinese authorities had foreseen the risks that some other developers would face like Evergrande. According to him, the downturn in the real estate sector could cause China's GDP to shrink by 0.5 percentage points this year.

 

anoop_mig25

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So what happened to Evergrande case .I mean did it defaulted or chinese managed the crisis
 

VivaVietnamm

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Not only Evergrande, China has so many slow-exploding debt bombs

Evergrande's total assets were larger than the entire U.S. subprime bubble in 2008. Lehman Brothers, the trigger of the global financial crisis, was in fact better-capitalized than Evergrande today. Even so, Evergrande is still too small a problem, because the Evergrande-style business model that has been replicated in China over the past two decades is the big deal. Exaggerating, real estate (real estate) has turned Chinese banks and local governments into hostages...

The problem of insolvency of the debt bomb China Evergrande is not a small one, but it is not a big deal or the only risk that China faces. The point is, Evergrande is just the tip of the iceberg, just a symptom of a faulty economic model, a growth model that relies on leveraged debt and GDP that grows at any cost with ghost cities, Unused infrastructure, abandoned public works…



50 ghost cities and 64.5 million uninhabited apartments scattered across China
Imagine, since 2018, according to ABC News and South China Morning Post, there are more than 50 ghost cities and 64.5 million uninhabited apartments scattered across China. However, many cities and real estate projects are still being invested and built.

In these ghost cities, everything is available, from close-up buildings to parks, lakes, well-planned transportation systems, only missing people. The paradox is that people cannot afford a place to live because housing prices are constantly increasing.

So how many Chinese property developers have poured money into these ghost cities? From 2018 to 2021, when the Chinese real estate market is increasingly gloomy, how many new ghost cities are born? What will be the fate of the real estate giants who create ghost cities, this userless infrastructure? Has Evergrande contributed at all to these abandoned real estate projects?

50 ghost cities, and 64.5 million uninhabited apartments scattered across China. Many experts and financial institutions are constantly warning about the real estate debt bubble of this economy... (Photo: jiawei cui / Pexels)

A real estate business model like Evergrande is not uncommon in China. A series of Chinese companies are heavily indebted, they have no choice but to continue to borrow frantically to make up for dwindling revenue streams and low profit margins. The question is, why are Chinese commercial banks still lending money to these real estate giants, and why are they still able to borrow money despite their bad financial situation? Why do ghost projects continue to be built despite its poor performance? The answers to all of these questions will expose the crux of China's economy's biggest risks, leaving the country exposed to massive corporate debt bombs across the country and leaving Evergrande in the middle of nowhere. It's just a small story in a bigger mess.

Big trouble

The central government needs high growth results to maintain stability in the country; Local governments are assigned targets and chase GDP growth records regardless of the long-term consequences to please the central government. So land, the ideal resource is fully exploited to serve growth. Real estate companies have become the backyards of local governments, pets, and debt instruments of local governments. These real estate businesses have access to preferential land resources, are awarded public investment projects, and are guaranteed loans by local authorities (formal or unofficial) at commercial banks. ) local and financial markets… In return, these 'real estate backyards' are ready to do all kinds of projects big and small, whether it's ghost cities or unused public works to help the local increase GDP in their mission. period.

According to Dinny McMahon, author of China's Great Wall of Debt, after the 2008 global financial crisis, local governments tried to promote growth. economy by promoting infrastructure construction and stimulating the real estate market. Because of this, private companies and state-owned companies race to pour money into construction projects with low use, causing waste. In addition, the massive construction of urban areas also comes from the over-optimism of investors when they believe that the real estate market can only grow and go up. But why isn't China moving towards a more sustainable growth strategy instead of risking the best global growth outcomes? Environmental failure, social contradictions growing in the heart of Chinese society are the opposite side of this policy of pursuing this growth record.

Looking at the 70-year history of the current administration, the failures in the centrally planned economic policy, the "Great Leap Forward"... have prompted the government to use theoretical numbers. in the era of integration to defend its legitimacy. Therefore, in the Revising U.S. report. Grand Strategy Toward China (roughly translated as Readjusting the US Grand Strategy towards China), Blackwill & Tellis (2015) asserted: "High GDP growth is the legitimate basis of the Chinese government's existence".

On the contrary, real estate also turns Chinese commercial banks into its hostage, commercial banks find ways to lend loans to real estate businesses to maintain the market value of real estate and avoid system breakdown. According to statistics, bad debt in Chinese banks/total outstanding loans is currently 1.755%. However, China's bad debt is currently not calculated by international standards because of its unique debt classification.

According to an announcement by HSBC in 2016, China's bad debt classification is as follows: First, bad debts are rated by commercial banks themselves based on the price of collateral. Even if the customer has completely lost the ability to repay both the interest and the principal, the commercial bank will still rank the debt as a good debt (class 1) - if this commercial bank assesses the value of the collateral is still greater the value of the customer's loan at that bank.

Second, when bad debts are too large, small commercial banks cannot "suffer", the worst debts are securitized and sold on the market. However, only the large commercial banks in the system buy back these debts (required by the government), and they record them as "investment in securities". In terms of form, bad debt disappeared from the books, but in fact, the debt volume is getting bigger and bigger and cannot be handled in the commercial banking system of this country.

to be continued
 

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