What’s happening with the real estate sector in China & will you see a 2008 because of China’s Evergrande looking at a possible bankruptcy ?
How big is Evergrande?
Evergrande is a Fortune Global 500 enterprise & the biggest residential developer in China with yearly sales amounting to $110B. Employees 2 lakh directly & creates 3.8m jobs each year indirectly. The current liability stands at 2% of China’s GDP.
What's happening right now?
An immediate repayment of about $305B is due to Lenders, Suppliers (building materials) & other investors (Wealth management structured products, Trusts & Commercial Papers) seems to be at risk because of a cash crunch at the developers end.
What lead to this?
China’s regulator tightened rules around ‘maximum’ debt borrowing by Real Estate developers, linking it to the firm’s cashflow, assets & capital levels (stringent than before) to cut financial risk & promote affordable housing in the country.
Why can’t Evergrande just sell the properties & pay debt or sell equity in the company and raise capital?
Will you buy a house in a project or equity in a company where the developer is expected to default? That’s the same problem.
So regulator tightened rules around new borrowing, sales of units of real estate slowing down, ticking interest payment, how will you pay off the debt? That’s where we are today in the Evergrande case.
How close is this to the Lehman crises? Nowhere close
(1) In 2008, Lehman was involved in trading not very known derivatives with global participants & leveraging (which blew it out of proportion); Evergrande has pure debt against real estate development, a known product.
(2) Most of the debt to Evergrande is by Chinese banks & hence spiral effect does not seem to be a popular opinion
(3) There are hardly any foreign investments in the Chinese Real Estate sector, another reason it should not spiral.
(4) Evergrande will reduce their properties price to pay back loans and hence there will be an impact in the housing market locally, employment & hence consumption. Credit off take at the banks may also slow down leading to slow domestic Growth slowing down in China may affect commodities but over all China is an export market & hence it should not have a material impact globally vs Lehman in case of US which is a huge consumer & hence had a global impact.
(5) If the government in any sense comes out to bail, Yuan will depreciate. Yuan is largely controlled & hence again a spiral effect is a less possibility .
All in all, this will be more of a local issue.
Who do you think will benefit the most from all these regulatory curbs in China?
This has already affected equity negatively (stock is down 90%) & can affect debt also because Evergrande holds close to 4% of the Chinese real estate high-yields in the dollar bond market, which can trigger a sell off in the high-yield market.