Financial crisis: The Evergrande case brings back bad memories – economy

It was actually supposed to be a festive day with cocktails, a buffet and a stock market bell: Just in time for the start of the expanded German leading index Dax with 40 stocks, the stock exchange leaders wanted to spread a media-effective optimism on the trading floor. But because of Corona, the organizers not only had to cancel the reception, the Dax also crashed into the depths, a loss of almost three percent had accumulated by noon. Investors’ concern: could a bankruptcy of the Chinese real estate giant Evergrande also affect the western financial markets? The SZ answers the most pressing questions.

What’s behind the real estate company Evergrande?

Evergrande doesn’t just sound big in name, the real estate company actually is. This company is the second largest real estate developer in the People’s Republic. At the end of last year, Evergrande was working on almost 800 real estate projects across the country. The principle: interested parties pay in advance, then the real estate company builds. Behind the company empire is the billionaire Xu Jiayin, who usually calls himself Hui Ka Ya. After his career in a state-owned steelworks, he founded the company in 1996 and benefited not only from excellent relations with the Communist Party, but also from the building boom in China. In 2017 he was published by the business magazine Forbes named the richest man in Asia. Now, however, the company is sitting on around $ 300 billion in debt.

Why does Evergrande have such big problems now?

The Chinese supervisory authority has issued a number of new rules in the past few months to cool the real estate market in the People’s Republic. The propaganda calls the “three red lines” the new financial requirements for construction companies. First, the ratio of liabilities to assets must be less than 70 percent. Second, the net debt ratio must not be higher than 100 percent. Finally, thirdly, a ratio of liquid funds to short-term liabilities is required that must be greater than a factor of one.

What sounds like dry financial arithmetic is a disaster for Evergrande: In April, the company tore all three specifications. The company is therefore no longer allowed to take out new loans. Since then, it has been difficult to repay bonds, but above all to continue building them. That in particular could kill hundreds of thousands of Chinese with their money. Because: Because the government had already made it difficult for construction companies to access bank loans in the past few years, many of the companies launched gray market funds or built them against prepayment. If Evergrande collapses, investors face huge losses.

Can’t Evergrande just sell its own property and use it to pay off its debts?

In theory, that would be possible. According to a press release, the group even wants to sell its own office building in Hong Kong in order to raise money. In addition, Evergrande is trying to part with its e-car division. The problem: So far, the group has not yet succeeded in either approach. But at least one of the company’s paint suppliers announced at the beginning of September that Evergrande had paid off part of its obligations in the form of real estate. Over the weekend, the company also offered its private investors to cash them out in real estate.

Will the Beijing leadership save the company?

One thing is certain: Without the legal tightening from Beijing, Evergrande would not be on the brink. It can therefore be assumed that the apparatus has taken into account that real estate developers are in existential danger. It is therefore very unlikely that there will be a large-scale bailout, i.e. a rescue operation. A smashing of Evergrande, however, is conceivable. Regional governments and agencies could then manage and complete individual residential complexes to prevent Chinese property owners from having to write off their assets.

Real estate and debts – many think of the 2007/2008 financial crisis. Could Evergrande have a ripple effect in the financial system?

The Chinese financial system is very isolated from the rest of the world. A bank failure like the one at the Lehman Brothers investment bank in autumn 2008 is almost impossible. However, it could be difficult for the leadership in Beijing to contain the psychological consequences of the Evergrande disaster and to prevent panic sales of real estate. Due to strict capital export controls and gambling on the stock exchanges, many Chinese have invested their fortunes in apartments. For years now, prices have not been explained with mathematics. Tiny two-bedroom apartments in Shanghai are being offered for eight million yuan. The expected rent: 7,000 to 8,000 yuan a month. Statistically, it would take a thousand months to pay off the apartment – 83 years. And that even though nobody in China is officially allowed to own an apartment. Because the building land belongs to the state, after all, China is a socialist country. Since the opening policy almost 40 years ago, real estate has only been leased for 70 years. An investment that you own for 70 years but pay for 83 years – this can only be explained with the strict belief that the Communist Party will protect the real estate market.

Why did the western stock exchanges appear so excited?

Experts do not currently consider a global financial crisis to be impossible, but also not to be likely. But even without a domino effect in the financial system, the Evergrande case could hit the stock exchanges: If the real estate bubble in China bursts in the wake of the turbulence, this could have serious consequences for the entire economy – from steel companies to handicrafts. Because private individuals have invested large sums of money in real estate, many Chinese could do without other expensive purchases in the future, for example a new car. German manufacturers in particular, for whom China is by far the most important market, would notice this in their balance sheets.

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