The decision to liquidate real estate giant China Evergrande has recently increased concerns about China’s struggling real estate sector. Nevertheless, experts believe that the impact will be limited.
• China’s real estate sector has been in crisis for a long time
• Highly indebted real estate giant is to be liquidated
• Impact on the Chinese economy will probably remain minimal
China’s real estate sector in crisis
China’s real estate sector has been in crisis for several months. With the economic slowdown caused by the corona pandemic and the decline in spending by the population, China’s property developers recorded significant losses in income, as the Reuters news agency explains. As a result, they found it difficult to service their debts. The government recently tried to create incentives for property purchases by relaxing lending. There is also reportedly a list of companies in financial difficulty that banks should invest in to help them out of the crisis.
A liquidation decision for the real estate giant China Evergrande has recently increased concerns about China’s ailing real estate sector. However, experts believe that the impact will be limited, as CNBC reports. One of the analysts even thinks that this could be “good news”.
Liquidation of Evergrande ordered: No “Lehman” moment expected
On Monday (January 29th), Hong Kong judge Linda Chan ordered the dissolution of the heavily indebted China Evergrande company. China Evergrande was taken to court over unpaid loans. The creditors based abroad repeatedly rejected a proposal to restructure the southern Chinese company’s debts amounting to several billion US dollars. In total, the hearing lasted a year and a half.
Shehzad Qazi, chief operating officer at China Beige Book International, told CNBC the following Tuesday that China will now be forced to absorb the liabilities of large companies like Evergrande within the real estate sector to protect itself from a larger contagion. “That’s actually the good news: China’s non-commercial financial system ensures there will be no ‘Lehman moment’ as the government effectively controls all middlemen in the economy and can force them to continue lending, delivering , to borrow, etc. In other words, not a massive credit event,” explains the expert. Qazi was alluding to the collapse of Lehman Brothers in 2008, which led to a crash in financial derivatives and ultimately plunged the global economy into recession.
Impact on the Chinese economy
China’s real estate sector is the bedrock of the Chinese economy, but the massive debt burdens on major property developers’ balance sheets have led to serious defaults. However, speaking on CNBC’s “Street Signs Asia,” Qazi explained that effective and comprehensive implementation of fiscal stimulus measures in China could lift sentiment and boost economic growth. However, in his opinion, economic growth this year will be slower than last year. “Can you stabilize the real estate market? And then what will the fiscal stimulus look like? Because, frankly, monetary policy stimulus has stopped working. It’s not effective in China,” he explains.
China Evergrande, once one of the country’s most prominent real estate developers, is the world’s most indebted company with liabilities of over $300 billion, according to CNBC. And despite a 20 percent share price drop and the temporary suspension of Evergrande shares on the Hong Kong stock exchange, fears of contagion from Evergrande’s likely demise remained relatively limited.
Also affected by the real estate crisis is one of the country’s largest property developers, Country Garden. Here too, people have problems paying off their own debts. The company reportedly said last month that it may avoid a default on its yuan-denominated bonds after being deemed to have defaulted on its dollar-denominated debt. “Considering how many defaults have occurred – the vast majority were offshore bonds – there are typically no cross-default clauses that mean these offshore defaults have to be recognized domestically,” said Charlene Chu, China Macrofinancial Senior Analyst at Autonomous Research, told CNBC’s “Squawk Box Asia.” “Many of the problems we’ve seen in the Chinese real estate market with all these failures have not translated into domestic financial instability.”
However, it remains unclear whether China will recognize the court order to liquidate Evergrande in Hong Kong, as the majority of the company’s assets are located on the mainland. Analysts at Commerzbank explain: “Even if a mainland Chinese court recognizes the Hong Kong court order, the impact will likely be limited due to Beijing’s more aggressive stance on risk containment and possible political considerations.”
Editorial team finanzen.net
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