Chinese Property Giant Evergrande’s Debt Default Could Spark The Next Asian Financial Crisis And World Stock Market Crash?
Charles Kelly BA CMgr FCMI
Property Investor, Wealth Coach, Podcaster, Author and Speaker.
Will Chinese Property Giant Evergrande’s Debt Default Spark The Next Asian Financial Crisis And Worldwide Recession?
The huge Chinese property company, Evergrande, is repaying investors in its wealth management business with property instead of cash this week. The world's most indebted real estate developer faces a crunch this week while investors fear a default.
Major banks have reportedly already been informed they will not receive interest payments on loans that are due this week and further interest payments of $84m (￡61m) on the firm's bonds are due on Thursday.
The company's shares dropped by more than 10% in Hong Kong trade on Monday, but are down 90% on its 52 week high.
The multi-billion dollar property business deepening debt problems have triggered fears over the impact its potential collapse could have on China's, as well as the western world’s, economies.
Evergrande grew to be one of China's biggest companies by borrowing a massive $300bn (￡217bn).
The Beijing government has recently brought in new laws to control the amount owed by big real estate developers to stave off a potential debt crisis.
This led Evergrande offering properties at major discounts to ensure money was coming in to keep the business afloat, is still struggling to meet the interest payments on its debts.
This uncertainty has seen Evergrande's share price tumble by almost 90% on last year and bonds have also been downgraded to ‘junk’ by global credit ratings agencies.
Businessman Hui Ka Yan founded Evergrande, formerly known as the Hengda Group, in 1996 in Guangzhou, southern China. He is worth $10.6bn, according to Forbes, but that figure may need updating.
Evergrande Real Estate currently owns more than 1,300 projects in more than 280 cities across China.
Evergrande Group now encompasses far more than just real estate development and includes businesses range from wealth management, making electric cars and food and drink manufacturing. It even owns one of country's biggest football teams - Guangzhou FC.
Too much diversification outside of the core business can stretch management and lead to problems.
How will it affect the world if Evergrande collapses?
Thousands of Chinese investors riding the wave of a booming market have bought property from Evergrande ‘off-plan’ even before building work began. They have paid deposits and could potentially lose that money if it goes bust.
The companies that do business with Evergrande stand to lose millions if the company fails to pay outstanding invoices. Firms including construction and design firms and materials suppliers are at risk of incurring major losses, which could force them into bankruptcy.
There are rumours of hundreds of unfinished projects where unpaid construction firms have downed tools.
The more worrying aspect is the potential impact on China's entire financial system.
"The financial fallout would be far reaching. Evergrande reportedly owes money to around 171 domestic banks and 121 other financial firms," the Economist Intelligence Unit's (EIU) Mattie Bekink told the BBC.
If Evergrande defaults, banks and other lenders may be forced to lend less.
This could lead to a 1997 Asian financial crisis or 2008 style credit crunch, when companies struggled to borrow money at affordable rates after the collapse of major financial institutions like Bear Sterns and Lehman Brothers, which plunged the western world into recession.
At the time, the relatively debt-free China helped to bail out America, but who can bail out China when western countries have already printed Trillions of dollars to save their own asses?
A credit crunch would be very bad news for the world's second largest economy, because companies that can't borrow find it difficult to grow, and in some cases are unable to continue operating.
Foreign investors have already started reducing their exposure in Chine due to tighter regulation and the CCP’s aim of spreading more wealth to the poor. They are after all a one party state communist country.
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Is Evergrande too big to fail?
There is a serious potential fallout if such an indebted company collapses and many has led some analysts believe Beijing will step in to rescue it in order to restore confidence in the real estate and wider markets.
The EIU's Mattie Bekink thinks so: "Rather than risk disrupting supply chains and enraging homeowners, we think the government will probably find a way to ensure Evergrande's core business survives."
But some are not so sure.
In a post on China's chat app and social media platform WeChat, the influential editor-in-chief of state-backed Global Times newspaper Hu Xijin said Evergrande should not rely on a government bailout and instead needs to save itself.
This also chimes with Beijing's aim to rein in corporate debt, which means that such a high-profile bailout could be seen as setting a bad example.
In a closed society we don’t know how deep this crisis goes and how much debt China really has got itself into to fund the massive national and international expansion over the last 20 years.
New cities have been springing up all over China, many of which have become ghost towns, while the country has spread its tentacles all over Asia and Africa in a bid to become the dominant player on the world stage.
Chinese citizens are heavy investors in real estate markets all over the world. Property bubbles have been forming in Australia, New Zealand, Vancouver, Manila and London where Chinese buyers have pushed up prices beyond the reach of local investors.
The old saying that if America sneezes the rest of the world catches a cold also applies to the world’s second largest economy.
Shares on markets in Asia, America and London are falling today as the shock waves of this potential financial disaster reverberate around the world.
As I have said many times on Money Tips, it only takes an event like this to burst and bubble and pull the comfortable rug of market confidence to trigger a collapse in share, bond and property prices.
If China goes down, the rest of the world is going down with it.
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