Evergrande, a new red light for the financial system

The Chinese real estate sector, which for years was seen as the engine of growth in that country and which represents 29% of its GDP, entered into crisis.

The tip of the iceberg is the unsustainable situation of the Evergrande construction company, one of the largest real estate developers in China that has recognized that it does not have the capacity to meet its obligations.

The high liability results from the fact that in good times the developer diversified into other sectors such as food, health services, electric vehicles or sports, projects that did not always come together. That expansion was largely supported by debt and a business model whereby the parent company sold its construction projects before finishing them to finance the next buildings.

Evergrande’s debt amounts to $ 300 billion. The company faces two maturities for September 20 and 23, for 84,000 million dollars.

China’s Ministry of Housing and Rural Urban Development announced since last week that the construction company did not have the resources to meet its obligations. The alternative is the rescue by the government or its bankruptcy.

“Most likely, China’s protectionist government would prevent the catastrophe and rescue him. But this will encourage moral hazard, which means that companies that act irresponsibly by increasing their risk will continue to do so with the certainty that they will always be rescued, ”explained Rankia Latin America’s chief economist, Humberto Calzada Díaz.

The Chinese Fannie Mae

Does the problem sound familiar? It is similar to the mortgage crisis in the United States that developed from 2006 to 2008, and which ended up brewing the global financial crisis of 2009.

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For now, it is more like the rescue that the US government made of the investment bank Bear Stearn in March 2018, and the rescue of the National Mortgage Association of that country, familiarly identified as Fannie Mae and Freddie Mac seven months later, in September. 2008, explained the professor and researcher of the National Polytechnic Institute (IPN) and the Autonomous University of Chapingo, Marco Antonio Durán.

Where are we going?

On September 17, the People’s Bank of China injected the equivalent of 14,000 million dollars into the financial market.

The objective of the transfer does not represent even a tenth of the scheduled maturities for this week, explained the Rankia expert. The intention behind this injection is to guarantee sufficient liquidity to an Asian market that could be impacted by the completion of the Evergrande rescue or its bankruptcy, he said.

What is most relevant about this episode is that China’s financial authorities and supervisors manage to defuse the bombs spread throughout the infrastructure sector.

Pay with property to lenders

Chinese real estate developer Evergrande, which has severe liquidity problems, has started paying investors in its wealth management products with real estate, said a unit of its main company, Hengda Real Estate Group Co Ltd.

Evergrande, which owes more than $ 300 billion, is in a liquidity crisis that has put it in a race to find funds to pay off its many lenders and suppliers.

The company said investors interested in trading wealth management products for physical assets should contact their investment advisers or visit local offices.

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Under one proposal, investors in wealth management products can choose from discount apartments, offices, retail space or parking lots for redemption.

There are an estimated 40 billion yuan ($ 6 billion) in Evergrande’s wealth management products, which may be in the hands of retail investors. (Reuters)

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