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What’s next? Is Evergrande going to be China’s “Lehman”?

Evergrande’s share trading was suspended by HKEX on Monday. As the Chinese property giant missed some of the coupon payments to its overseas’ bondholders last Wednesday. The interest payment was due to pay $47.5 million. The company is now facing debts of more than $300 billion.  Is Evergrande going to be China’s “Lehman” causing a domino effect for the global economy? It is unlikely.

How did Evergrande fall into a debt crisis?

Evergrande has been known as a high-yield bond issuer and relies on quick turnover of its discounted properties-selling as a business model. The long in debt business is finally collapsing due to the ruling-out of government policy to dismantle the debt bubble in the property markets. China’s housing markets value was 62.6 trillion, 414% of the GDP in 2020, which was close to the level in Japan in the 1990s before the Tokyo property market collapsed. To cool down the housing market, the PBOC announced “three red lines” metrics regarding debt to its property developers in 2020. The policy imposed limits on the debt ceiling on liabilities to assets, net debt to equity, and cash to short-term borrowing. The policy has not only tightened credit conditions to the developers but also held back property investors. Evergrande has come under strain from the debts issues since, and the debt bubble has finally busted in a result of it.

What’s next?

Evergrande’s debts include onshore and offshore bonds, local and foreign currencies loan funds, and delayed payments for its workers. It has 200,000 employees and indirectly sustains 3.8 million jobs. It also has 1,300 ongoing projects in 280 cities. Beijing is likely to step in and handle the crisis to avoid a wider financial market and possible social unrest. It might be like how they did to handle the NHA crisis back in February. However, the Chinese government might not directly inject cash or buy off debts from Evergrande. Instead, they will urge state-owned companies to purchase its debts and assets through restructuring the company. Therefore, the crisis spillover out of China is unlikely.

How does the crisis affect the Chinese economy?

The housing market and relating industries account for one-third of economic activities in China. Harvard economics professor Kenneth Rogoff said Evergrande’s crisis might make a loss of 1-2% in China’s GDP in 2021. But if Beijing is going to take measures to handle the crisis and keep all ongoing projects running, the following story will be different.

However, China’s economy will be certainly softening in 2021 because of the measures taken to limit property debts leverage. China is in the progress of reforming the economic structure. The country will invest more in new technologies and the AI industry rather than relying on land selling and property development.

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