China property bubble threat to world economy – Birmingham Post article 18.11.2021

I heard a fund manager say recently that when it comes to financial markets the only risks worth worrying over are the ones we don’t yet know about!

Therefore, it is a plus that at least we are well aware of the problems at Chinese group Evergrande, its indebtedness and the serious knock-on effects globally should it default.

It hasn’t yet, but equally we certainly shouldn’t be complacent in terms of the possible ramifications if things worsen.

Evergrande is the world’s most leveraged property developer – owing more than $300 billion.

A collapse could push the already teetering Chinese property sector over the cliff, threaten the stability of Chinese banks, and potentially dent the world economy. That is the worst-case scenario.

Businessman Hui Ka Yan founded Evergrande, formerly known as the Hengda Group, in 1996 in Guangzhou. Once Asia’s richest person, he has a personal fortune of more than $10 billion, according to Forbes magazine. The firm says it has 200,000 employees, but indirectly creates more than 3.8 million jobs every year.

Evergrande expanded aggressively including into sectors outwith property – its operations range across wealth management, electric cars and food and drink manufacturing. It even owns one of country’s biggest football teams, Guangzhou FC.

However, it was all on the back of borrowings.

Now it is struggling to meet its repayments, is so desperate it has begun meeting overdue bills by handing over unfinished properties, and, according to the New York Times, has even asked employees to lend it money.

Suppliers and creditors have claimed hundreds of billions of dollars in outstanding bills. Some have suspended construction on Evergrande projects – there are nearly 800 across China that are unfinished, and as many as 1.6 million people who are still waiting to move into their new homes, according to an estimate from Barclays.

The “locals” are not happy.

Meanwhile, writing in The Financial Times in late August, the billionaire investor George Soros warned that an Evergrande default could cause China’s economy to crash.

The company’s main share listing in Hong Kong has lost more than three-quarters of its value over the past year.

Foreign investors alone are owed $7.4 billion in bond payments in 2022. They fear that if Evergrande fails than all will be lost.

“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 Mattie Bekink told the BBC.

In the past Beijing has ultimately bailed out large companies that have got into trouble.

More recently though, regulators have been cracking down on reckless borrowing, putting a 70 per cent ceiling on liabilities, 100 per cent cap on net debt to equity, and demanding a cash to short-term borrowing ratio of at least one.

Nevertheless, pundits say the likelihood is that some sort of salvage job will be cobbled together.

Ms Bekink said: “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.”

Mark Williams of Capital Economics told CNBC: “The most likely endgame is now a managed restructuring in which other developers take over Evergrande’s uncompleted projects in exchange for a share of its land bank.”

He thought it likely the government would prioritise homebuyers and banks over other parties. “Policymakers’ main priority would be the households that have handed over deposits for properties that haven’t yet been finished. The company’s other creditors would suffer.”

The government would wish to avoid “systemic risks” in the lead-up to the 2022 National Congress of the Chinese Communist Party, added investment bank Natixis.