Is the Evergrande crash a moment for China’s Lehman Brothers? | Business and Economic News


After Lehman Brothers declared bankruptcy on September 15, 2008, photos of hundreds of employees walking out of the New York City headquarters with boxes in their hands became one of the long-lasting photos in the global financial crisis. This is an indication that leading companies in the industry may go bankrupt and It drags down a country and the whole world.

Now, the image of dissatisfied investors, employees and suppliers of China Evergrande Group set up outside the company’s Shenzhen headquarters in recent weeks may become their own shorthand.

The real estate company is in serious trouble.Monday, it Failed to pay interest According to Bloomberg News, the company pays at least its two largest bank creditors, and it looks like it will not be able to pay interest on the approximately US$83.5 million in bonds due on Thursday.

People sitting outside Evergrande’s Shenzhen headquarters in China, demanding repayment of loans and financial products, this was one of a series of protests in the office of the Chinese company [File: David Kirton/Reuters]

Investors worry that Evergrande’s debt default may bring shock waves to China and the global economy, just as Lehman Brothers did to the United States and the world in 2008.

But China in 2021 is not the United States in 2008, and it is not clear what measures the Chinese government is willing to take to avoid the social and financial turmoil that may be caused by the collapse of Evergrande.

So, will the Heng Conference become China’s Lehman Brothers moment, or will it be too big to fail under President Xi Jinping’s China? This is what you need to know.

review. What kind of company is Evergrande?

Evergrande currently holds the title of the most indebted real estate developer in the world. Founded by Xu Jiayan in 1996, it has now grown into one of China’s largest companies, and in the process has made Xu the 53rd richest person on the Forbes 2021 Billionaires List and the 10th richest person on the 2020 China Rich List.

According to its website, the company currently has 1,300 real estate projects in 280 cities in China, and also involves electric vehicle production, property management, film and television production, theme park construction, life insurance, healthcare, football and food and baby products.

So how serious is Evergrande’s debt?

The company has $300 billion in liabilities, and its leadership has made it clear that there is no way to make payments to various creditors on time.

This makes investors inside and outside China very worried, including potential contagion effects.

what is that?

In short, it is worried that the turbulence or crisis of a large company or country may spread to other companies or countries. For example, when Lehman Brothers filed for bankruptcy, it had a contagious effect on other major financial institutions with which it had trade relations.

On September 15, 2008, this 158-year-old investment bank filed for Chapter 11 bankruptcy protection from its creditors, and the woman left Lehman Brothers headquarters in New York City with a suitcase. [File: Louis Lanzano/AP Photo]

Facts have proved that the U.S. banking industry is composed of relatively few participants, whose assets, interests, and destiny are more closely intertwined than many people think. When Lehman Brothers collapsed, it sent shock waves to many other companies in the United States and other regions.

Thanks to globalization, the ties between the economies of various countries are closer and wider than ever before. Therefore, when the United States experienced the 2008-2009 financial crisis, the global market felt the chain reaction.

Similarly, since China is the second largest economy in the world, what happens to Evergrande in China may affect financial institutions and countries around the world.

Has Evergrande Legend already had a chain reaction?

Yes. Hong Kong’s Hang Seng Index fell 3.3% on Monday, and its real estate index plunged 6.69%, hitting a 52-week low. However, the broader index and the real estate index both closed higher on Tuesday.

Similarly, the U.S. stock market saw its biggest decline since May on Monday, partly due to Evergrande’s concerns (not sure if the Fed will signal this week that it plans to start reducing some of its economic support to the U.S. economy in the COVID era. This is also Worry investors).

The bulk commodity market has also felt the turbulence of Evergrande. This helped push the price of copper to a nearly one-month low, as investors fear that if Evergrande’s large-scale construction projects come to a halt, demand for metal used in construction will be affected. Iron ore and crude oil prices also fell due to concerns about weak Chinese demand.

So, will only companies with connections to China be affected?

will not.Concerns about Evergrande are also right Stocks of companies that have little to do with China, Which shows that Evergrande’s uncertainty has exacerbated some of the broader investor anxiety in the air this week.

Art Hogan, chief strategist at the National Securities Company, told Bloomberg News: “You have a whole set of things to pay attention to-confuse this title and everything will become distorted.” “Therefore, there will be illogical and irrational risk-taking. Does it make sense to sell technology stocks? No, but with risk aversion, everything tends to sell—even cryptocurrencies.”

In fact, Evergande’s nervousness has spread to the world’s largest cryptocurrency, Bitcoin. All the way down to $40,468 on Monday, According to CoinMarketCap.

Will we definitely see the contagious effects of China’s banking industry?

Nothing is certain in the market. But on Monday, Standard & Poor’s Global Ratings weighed its assessment.

Standard & Poor’s Global Ratings Credit Analyst Zeng Rui’an said in a report: “We believe that the Chinese banking industry can absorb Evergrande’s default without major interference, but we will pay attention to potential chain reactions.” “Compared to Chinese banks. Evergrande’s total loans are very small. The banking industry’s direct exposure to Evergrande seems to be well distributed.”

What about other Chinese real estate companies?

S&P Global Ratings Credit Analyst Christopher Yip wrote in the same report: “We expect that the default risk of weaker and more leveraged real estate developers will increase.”

What about small investors?

They were so worried that retail investors, suppliers and even Evergrande employees gathered outside the company’s offices to demand the repayment of loans and other financial products.

Isn’t this kind of protest very unusual for China?

you bet. China is a country that values ​​social stability. But some analysts believe that this is a reason for the government to intervene and curb potential consequences that may harm the little ones.

“[The protests] Edward Yardeni, president of Yardeni Research, told Al Jazeera that they have more reasons to try to use this Humpty Dumpty to fix what they can do.

“Humpty Dumpty is plummeting, and if anyone can reattach it to a certain extent, it is the Chinese government, because they do have so much control,” he added. “I think they are really worried that if they don’t deal with this problem right away, more eggshells will break.”

Why doesn’t China rescue Evergrande?

The government is always worried that if they step in and bail out companies that engage in reckless behavior—such as taking on debts beyond their capacity—then they will send a signal to other large companies that they might behave just as bad, because the government will always It is there to give them a lifeline. This is what economists call “moral hazard.”

In addition, the Chinese government has been trying to cool China’s real estate market and reduce its importance to the overall economy. One way is to control excessive borrowing by developers like Evergrande.

What is the future of China’s real estate market?

Due to the declining housing demand and the rapidly aging population structure in China, the entire industry may face trouble.

Capital Economics chief Asia economist Mark Williams wrote in a report: “The root of the problem with Evergrande and other highly leveraged developers is that China’s residential real estate demand is entering an era of continuous decline.” Attention September 15.

China Evergrande Group has developed a large-scale residential and leisure complex in Qidong City, Jiangsu Province, China, named “Venice Life” [File: Qilai Shen/Bloomberg]

So is it time for Lehman Brothers in Evergrande China?

This is the $300 billion problem. Analysts at Citigroup and Barclays said they did not think so. Neither does Yadney.

“I don’t think this will be the time for Lehman Brothers because Lehman Brothers was not rescued. The U.S. Treasury Department and the Federal Reserve made a very conscious decision not to rescue Lehman Brothers — they did not realize that its failure would To what extent does it have a global impact,” Yadney said. “I think the Chinese government is very aware of the risks Evergrande faces. I don’t think they will reorganize it so much.”

But on Tuesday, Udai Kotek, one of the richest bankers in the world, wrote on Twitter: “Hengda seems to be China’s Lehman moment.”

Kotak, the CEO and founder of Kotak Mahindra Bank, an Indian bank, likened the Evergrande legend to the fate of the Indian Infrastructure Leasing and Financial Services Co., Ltd., who helped oversee the restructuring after debt default.

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