Evergrande in Crisis: Will Beijing Save the Staggering Giant?

The impending bankruptcy of the Chinese real estate company Evergrande has triggered turbulence on the Asian stock exchanges. China’s central bank is trying to calm the nerves. Experts wonder if the government will step in.

The impending bankruptcy of the Chinese real estate company Evergrande is causing increasing unrest on the international stock exchanges. For days now, the financial centers of Shanghai and Hong Kong have only been going downhill. The situation has come to such a point that, according to a report by the Bloomberg news agency, the Chinese central bank has pumped $ 14 billion into the banking system to calm the situation. Apparently with success: the leading index of the Shanghai Stock Exchange closed unchanged on Friday after falling deep into the red in the previous days.

Investor concern is the crash of Evergrande, one of the largest real estate developers in China. Since the beginning of the year, paper has collapsed by 81 percent, and in the past month alone the company has lost almost half of its value. Evergrande is currently valued at just $ 4.7 billion on the stock exchange.

Debt as high as Finland’s economic output

This increases concerns about a crash of the group, especially in view of its horrific mountain of debt. The real estate giant’s total liabilities amount to over 300 billion US dollars – this corresponds to the total economic output of Finland or two percent of the Chinese gross domestic product. 90 percent of the debt is held by the banks, including all of the country’s well-known institutions such as the ICBC, Industrial & Commercial Bank of China and the Agricultural Bank of China.

A first baptism of fire of Evergrande’s solvency is due this Monday. Then, according to Bloomberg, an initial repayment of a multi-million dollar loan is due. Another tranche has to be paid back on Thursday. The Chinese authorities have already warned that the company will not be able to make the payments.

Fear of a wildfire

The rating agencies have also long since had Evergrande on their radar. The rating agency Fitch downgraded the real estate company’s creditworthiness to the penultimate level (CC) on its rating scale. Moody’s also rates Evergrande at “junk level”. In the eyes of the experts, insolvency thus appears likely. There could even be a conflagration that would drag other companies with it into the abyss.

The big question now is whether the Chinese state will step in and save the company. Evergrande is actually considered “too big to fail” – too big to let it fail. Should Evergrande actually become insolvent, which is likely to shake the entire Chinese real estate market, this would also hit the lending banks and millions of private home buyers. “We’re talking about 1.2 million people in China waiting for Evergrande to finish building the apartments for which they paid a lot of money,” said Alicia Garcia Herrero, chief economist for the Asia-Pacific region at French investment bank Natixis .

Is there a threat of a “Lehman effect”?

In view of these dimensions, other experts assume that the state will intervene in order to prevent a domino effect. “I am optimistic that the Chinese state will not let things escalate,” said Hanns-Günther Hilpert, head of the Asia research group at the Berlin Foundation for Science and Politics (SWP), the “Handelsblatt”. Jörg Wuttke, President of the Chinese Chamber of Commerce in Beijing, believes it is entirely possible that there will be no money from the state. But even he does not believe in a “Lehman effect”. “Even if the central government chooses to let Evergrande go bankrupt, the authorities will likely be involved in coordinating the continuation of the projects of a corporation that employs 163,000 people,” he told the business newspaper.

The days of guaranteed salvation may indeed be over. William Russel of asset manager Allianz Global Investors believes it is entirely possible that Beijing will send a signal to other real estate giants that Evergrande will not be bailed out. The Chinese newspaper “Global Times”, which is close to the Communist Party, ruled recently that Evergrande was not so significant that bankruptcy had to be prevented by all means.

New rules for the real estate market

Experts therefore do not want to rule out that the Chinese government will make an example of Evergrande. She has long viewed the high debt in the real estate sector as a problem: On the one hand, Beijing fears for the stability of the market, and on the other hand, horrendous rents are now being demanded in many large cities. As a result, the leadership in Beijing has issued new restrictions designed to cool the overheated housing market. Among other things, it made borrowing and property purchases difficult. The government wants to take action against speculation on the housing market and let air out of the real estate bubble.

Chinese propaganda calls the new financial regulations “the three red lines”. These state that the ratio of liabilities to assets must be below 70 percent, the net debt ratio must not be higher than 100 percent and the ratio of cash and cash equivalents to short-term liabilities must be greater than a factor of one. Evergrande broke all three specifications.

With information from Steffen Wurzel, ARD-Studio Shanghai