Chinese real estate developer Evergrande Group has raised concern among investors around the world. With $ 300 billion (£ 220 billion) owed to its creditors and major debt interest payments due on Thursday, the company’s troubles have rocked global financial markets.
As the second-largest real estate company operating in the largest sector of the world’s second-largest economy, it’s clear why investors are worried, with some drawing parallels with the Lehman Brothers collapse in 2008. This is also about an important test for Chinese President Xi Jinping, as Beijing tries to limit financial risks and concentrations of wealth while trying to limit the economic impact.
Adam Tooze, professor of history at Columbia University, said that while comparisons to 2008 were drawn, there were differences. The housing market is undergoing a correction that was to some extent planned, with Xi forcing economic reforms.
“Unlike Lehman’s catastrophic chain reaction, this is a controlled demolition, deliberately initiated by the regime,” Tooze said.
“Beijing is doing what critics have been asking China to do for some time: deflate the real estate bubble. It is doing what the West did not do in 2007-2008, which is to use regulatory intervention to handle a hard landing without a real crash. “
For years, concerns have been expressed about skyrocketing corporate debt levels in China, with rapid growth to over 160% of GDP. The International Monetary Fund has previously warned that the debt explosion could trigger the next global financial crisis.
On Wednesday, Evergrande decided to appease investors by pledging to pay $ 36 million (£ 26 million) in interest due on its domestic bonds on Thursday. The company still has to pay $ 84 million on a separate US dollar bond. However, the signal that it has liquidity ready to be paid by investors has helped lift Asian financial markets.
After opening lower, the Shanghai Composite Index closed 0.4% higher on Wednesday, while the Shenzhen benchmark fell 0.6%. Markets remained closed in Hong Kong and South Korea for the Mid-Autumn Festival.
Amid investor concern, China’s central bank announced it would inject $ 14 billion into the banking system. Financial markets around the world rallied on Wednesday, with the FTSE 100 rising more than 1%.
“This is not China’s ‘Lehman moment’,” said Freya Beamish, chief economist for Asia at Pantheon Macroeconomics. “The Chinese authorities will neither allow a complete collapse, nor the risk of a financial crisis, to take stock of moral hazard.”
Instead, analysts expect Beijing’s push to tackle indebted companies to follow a path of controlled decline, demonstrated by the central bank intervention. Bondholders are susceptible to losses, but buyers and suppliers should be protected.
It is not a risk-free process. Analysts expect the fallout to weigh on China’s economy, after years when the real estate sector – which accounts for 29% of GDP – has served as a powerful engine of economic growth. Parallels to a 2003 consumer debt crisis in Korea are being drawn, when a massive boom in credit card lending was followed by a painful collapse, dampening growth as households restricted their spending.
“Evergrande is like Lehman in that he speculated on real estate. He has a lot of debt spread across the whole Chinese economy and society. It is opaque. It’s worrying, ”Tooze said.
“But is Evergrande really Lehman?” A closer look suggests that the Evergrande crisis does not look like Lehman at all. “