Evergrande for Foreign Investors: Limiting Contagion Worries Written By Strauss Cooperstein
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vergrande and other indebted Chinese property giants are on the verge of collapse, proving to be one of the biggest tests to China’s financial system. Evergrande owns more than 1,300 real estate projects across 280 Chinese cities in addition to its other consumer businesses and theme park holdings. For context, Evergrande’s total liabilities collectively amount to roughly 3% of China’s annual GDP. Domestic home buyers and investors have protested at Evergrande’s headquarters demanding repayment of overdue loans, and implications for foreign investors remain unclear. Given that Evergrande’s shares and bonds can be found in many Asian funds and indices, foreign and local investors alike fear “cross default.” In fact, a potential credit default swap would protect the interests of onshore suppliers and creditors (banks and households) at the expense of offshore equity and bond holders. In order to reduce global contagion worries and reassure foreign investors, Chinese authorities, regulators, and the People’s Bank of China (PBoC) must consider implementing gradual monetary policy to begin slight easing and sharing
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Chinese authorities, regulators, and the People’s Bank of China (PBoC) must consider implementing gradual monetary policy to begin slight easing and sharing a government plan before any credit event occurs.
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Cornell Business Review
a government plan before any credit event occurs. Waiting to observe a continued decline in property sales and weaker domestic consumption will only increase negative sentiment regarding contagion. On the flip side, bailing out Evergrande too soon will only perpetuate moral hazard in China’s property sector.
When considering any spillover into the global economy, investors should recognize that Evergrande is not a “Lehman Moment” given several qualitative and quantitative differences, and instead is a controlled implosion as a result of President Xi’s deleveraging and de-risk initiatives. In fact, the Evergrande crackdown was caused by Chinese regulators concerned with real estate speculation and who plan to test the company’s ability to make interest payments. By initiating property lending restrictions, the “three red lines” policy, and centralized land auctions, Chinese state intervention in its financial and mortgage markets is unlike that of the US’ financial system. This demonstrates Beijing’s commitment to making an example of Evergrande and then resolving the liquidity situation internally, without causing any intended global spillover. Quantitatively, Evergrande’s current liabilities of approximately $300 billion USD (2% of China’s GDP) is still less than Lehman’s $613 billion USD (4% of US GDP in 08’). In addition, the Lehman liabilities were far more entangled in the less regulated and transparent subprime MBS and derivatives markets at the time. The current Chinese property development sector is healthy and almost 30% of national GDP yet only represents 8% of total
