This is why the Evergrande crisis is not China’s “Lehman moment”.


The headquarters of the Evergrande group will be in Shenzhen, southeast China, on September 14, 2021. The Chinese real estate giant said it was facing “unprecedented difficulties”, but denied the claims. rumors that he was about to fall.

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Evergrande owns physical assets

But when it comes to the scale of the potential impact on international financial markets, analysts point out the big difference between the Evergrande crisis and the Lehman shock. Evergrande owns the land and Lehman owns the financial assets.

Evergrande has cash flow issues, but talking about systemic risk is “frankly a bit of a stretch,” Rob Carnell, head of Asia-Pacific research at ING, told CNBC’s “Squawk Box Asia” on Wednesday. ..

“Let’s face it. It’s not Lehman, it’s not LTCM,” Kernel said, referring to Long-Term Capital Management, a large US hedge fund that went bankrupt in the 1990s. It’s not a hedge fund with a large leveraged position or a bank whose financial asset prices are skyrocketing to zero. It is a real estate development company with significant debt of over $ 300 billion . “

He hopes that if Evergrande can get cash flow from the physical assets, the company can complete development projects, sell them, and start paying down debt.

On Wednesday, the company’s real estate group said it would pay interest on the mainland-traded bonds denominated in RMB on time.

“Evergrande owns a large land bank but is facing a liquidity crisis,” Macquarie’s chief economist for China, Larry Fu said Tuesday. He said the developer’s assets mostly consist of land and housing projects worth just over 1.4 trillion yuan ($ 220 billion).

There is no Lehman moment, because the Lehman-style epidemic does not make sense here.

The collapse of Lehman Brothers in 2008 led to the collapse of financial derivatives (credit default swaps and secured debt), “the market has become suspicious of the health of other banks,” Hu said.

“But the Evergrande group is very unlikely to plunge land prices,” he said. “After all, the value of land is simply more transparent and stable than financial instruments, especially in China, where local governments dominate the supply of land.”

“resulting in, [the] Local authorities are strongly encouraged to stabilize land prices. In the worst case, local governments could even buy back land, as in 2014-15. “

Strong government control

Another significant difference in the case of Evergrande is the high level of government control and involvement in the Chinese real estate sector.

“Chinese banks and many other entities are first government agencies and second intermediaries,” an analyst with research firm China Beige Book said in a report on Monday. “Even non-state finance can be managed to a degree rarely seen outside of China. Commercial bankruptcy is a national choice.

“Beijing says it’s going to lend, so you lend it. When you get your money back, or even if it’s secondary, ”the report says. “There is no Lehman moment because the Lehman epidemic story doesn’t make sense here.”

The legendary American investment bank collapsed 13 years ago this month at the iconic time of the global financial crisis. Banks underwent tens of billions of dollars in subprime mortgage-backed securities during the US housing bubble. The US government ultimately allowed Lehman to go bankrupt, but bailed out other financial institutions.

In the case of China, Beijing has sought to allow the market to play a larger role in the economy by defaulting on loans from more state-owned enterprises.

Macquarie Chairman Hu said authorities would be patient with Evergrande’s case because they have two goals: to prevent excessive risk-taking and to keep the real estate market stable.

“Policymakers will choose to wait first and then intervene later to ensure orderly debt restructuring,” he said. “Large bailouts are unlikely and shareholders / lenders may suffer significant losses, but the government confirms that pre-sold apartments will be completed and delivered to homebuyers. . “

Hu also highlighted the recent achievements of the Chinese government in restructuring such giants as Anbang Insurance, Bank of Commerce, HNA Group and China Huarong Asset Management. “The annual profit of the Chinese banking system is 1.9. [trillion yuan] And 5.4 provisions [trillion yuan]The loss of Evergrande can be easily absorbed. “

“China has tools,” says the IMF.

In the case of Evergrande, real estate developers have more direct relationships with foreign investors than most of the Chinese economy.

According to investment bank UBS, the company’s offshore bond issuance is about $ 19 billion, or about 9% of Chinese bonds denominated in US dollars. According to the report, Evergrande’s total debt is around $ 313 billion, or about 6.5% of the total debt of the Chinese real estate sector.

UBS analysts expect Evergrande to restructure its debt and expect bond prices to recover from lows and limit infections.

Analysts also showed the extent of the ripple effect Evergrande could have if it entered a scenario where it was unlikely to be fully liquidated, such as an exposed bank failure or a sell-off. emerging market credit ladder.

“China has the tools and the political space to prevent this from falling into a systemic crisis,” Gita Gopinato, chief economist at the International Monetary Fund, told Reuters.

The IMF can organize relief for countries and regions in financial difficulty.

Government statements in recent months have called for the prevention of significant financial risks, but have not benefited from the intervention of the Chinese authorities.

Chinese authorities have so far issued several important official statements on the Evergrande Group.

At a press conference last week, a spokesperson for the National Bureau of Statistics said the ministry was monitoring the difficulties and potential economic impact of some large real estate companies.

Moody’s estimates that the Chinese real estate market, along with related industries such as construction, accounts for more than a quarter of GDP.

The bet that house prices would only increase ultimately forced many Chinese households to take out mortgages to buy homes. In recent years, the government has sought to cool the market with measures such as limiting the level of debt developers can incur.

– CNBC’s Eustance Huang and Weizhen Tan contributed to this report.

This is why the Evergrande crisis is not China’s “Lehman Moment”.

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