Could this real estate group provoke financial contagion in China?


If not its heart, the China Evergrande Group, with its countless development subsidiaries, is at least a bloated, central residential Chinese financial system. A vast conduit through which so much of the capital flows through which the central government is forcibly feeding the economy, the heavily indebted group is now seeing its shares plummet and its assets frozen by regulators. The question is: is it really not going to succeed?

Evergrande’s commitments now exceed 2 trillion yen, and the T stands for over $ 300 billion. The financiers are so skeptical about the company’s financial soundness that 2023 bondholders are forced to accept a 53% discount to pledge the bond as collateral. A Chinese bank recently froze more than $ 20 million in deposits at Evergrande, a city in Hunan province temporarily suspended sales because, he said, Evergrande had not set aside enough money to pay buyers if the apartments were not rented out and the company’s dollar-denominated bonds were trading at almost … 50% discount. Evergrande sold non-property assets to pay off some of the debt and appease the central government.

As with everything in China, the scale of Evergrande is breathtaking. Debt to financial institutions is just one part. Evergrande brilliantly creates a vision of a cosmopolitan non-Chinese life that awaits domestic consumers, if only they buy – well in advance – an apartment that can be built in two to three years. Stone dolphins frolic in the fountains leading to the complex’s sales offices. Buyers are promised cinemas, “international culinary streets”, badminton courts and five-star hotels. The apartments are fully furnished with Western appliances, and the model apartments invariably feature foreign touches such as cans of dried pasta and buckets of (empty) champagne, things that are foreign to the Chinese but are key to their pursuit of future wealth. The complexes, which usually employ about 25%, naturally look attractive to buyers from overcrowded cities. Evergrands survives by combining brilliant marketing aspirations and avoiding all means to avoid the inevitable consequences of its crushing debt.

An apartment in Evergrande is the ultimate speculative asset, like a brick-and-mortar mutual fund. All over the country, Evergrande owners own these condos in remote suburbs and dream of the day their child grows up to sell the condo for their Harvard studies. Responsibility to China’s ambitious middle class is what makes Evergrande ultimately too big to fail. Its failure will be the result of an extremely high level of public confidence in China’s economic system, growth and leadership.

This is not the first time Evergrande has attempted to foment the contamination of the financial system. The company made a huge commitment to pay for land in Jiangsu province back in 2008 and made a bid to go for an IPO and raise money. By 2012, off-balance sheet liabilities already exceeded revenue. Last September, the company avoided disaster by striking a deal with debt holders to forgive the debt in exchange for other perks. The chairman and founder of Evergrande, who calls himself Ka Yang Hui, is known for loving casinos and seems to enjoy the adrenaline rush during these poignant moments of balancing on the brink.

He has nothing to worry about. In any case, Hui Ka Yan can see his personal fortune diminish. The gluttonous beast that China’s central government has become will not tolerate so much wealth in the hands of one billionaire. But assets will get their help one way or another, perhaps like Anbang, HNA, Dalian Wanda and other over-leveraged property groups that have been substantially restructured, stripped of key assets and placed in the equivalent of a witness protection program. Rescuers must maintain the collective public misconception that acres of empty and dilapidated homes are really worth something and that they represent the thriving embryo of a bustling new metropolis that, among other things, promises infinite asset value for an apartment. owners

Successively abandoned assets do not make a profit in the real economy, but their face value, which has never been market tested, supports more and more credit in the financial system. Thus, the refusal to default led to inflated collateral values ​​and made possible massive asset correlation, with the result that mostly dead assets of nominally high value stood like a forest of dry trees, fueling a fire for a future fire. The risk covers most asset classes and means that the financial crisis will not be regional and will not be limited to one asset class, because the value of real estate, stocks, wealth management products and bonds depends on the contingent and unverified data of another asset. value. For households, as yet unconfirmed paper losses and heavy family debt pressures will noticeably permeate the family table.

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