No, the Evergrande crash is not a new Lehman Brothers. The fears that the Shenzhen real estate giant crushed by 305 billion dollars of debt could drag the financial sector with it, triggering a maxi-contagion even outside the Chinese borders, were revealed in the black monday of the world price lists. On Monday, the company left more than 10% on the Hong Kong Stock Exchange on the ground, at its lowest since May 2010, confirming itself under increasing pressure also in view of the deadline on Thursday when the payment of interest on offshore bonds is scheduled. But the fear that, without (unlikely) external bailouts, Evergrande will not be able to repay its short-term debts (according to Standard & Poor’s it will have to repay more than 35 billion in the next twelve months), and that its failure will infect the Chinese economy it overflowed on all European markets and on Wall Street which recorded the worst session since last May. The Vix index, often called the thermometer of fear, has soared 34% to its highest in over four months. Evergrande, on the other hand, is China’s second largest real estate company, owns more than 1300 real estate projects in over 280 cities, and has seven subsidiaries engaged in other industries such as electric vehicles, healthcare, TV. The company has 200,000 employees, but overall it helps create jobs for more than 3.8 million people, the website reads. The specter of Lehman immediately entered the minds of many observers.
However, the financial markets have not yet been deeply penetrated by Chinese finance: in the MSCI World index, Beijing companies weigh only 4%, and Evergrande is not among them. But there are many aspects that lead to the exclusion of a new Lehman in Chinese sauce if the real estate company, as many are now convinced, should go upside down. “The differences between Evergrande and Lehman”, Alessia Amighini, co-director of the Central Asia Department of ISPI, an expert in Chinese economics and EU-Asia relations, told HuffPost, “are very numerous. But first of all it must be remembered that Lehman was an investment bank that had financial instruments spread all over the world, moreover securitized with a bit of everything, in particular mortgages and junk securities as we have seen. Evergrande, on the other hand, is a real estate company. And even if in 2008 it all began with the bursting of the subprime real estate bubble, the real problem from which the financial mega-contagion arose came from the excessive use of the securitization of mortgages and junk securities ”.
“We think the Chinese authorities have the fiscal and monetary capacity to cushion the shock,” said OECD chief economist Laurence Boone. “The impact will be quite limited except of course for some particular companies.” Beyond the flare-ups on the stock market on Monday, at the moment there are no signs that the contagion could extend outside of China, even if the Shenzhen group is exposed with more than two hundred banks and credit institutions, such as Blackrock, Ubs and Ashmore.
Inside, yes, it will certainly have repercussions, starting with the Chinese real estate sector. Today Standard & Poor’s downgraded Sinic Holdings Group to “CCC +”, with a negative outlook, citing the inability of the Shanghai-based Chinese real estate developer to “communicate a clear repayment plan” for an expiring bond. Sinic fell by 87% on the Hong Kong Stock Exchange with the consequent suspension of the securities from trading. In order to counter the liquidity crisis, the company was considering a cut in compensation for employees at its headquarters and one for top managers by up to 70% or more, according to the Chinese newspaper The Paper. The company has a 9.5% bond worth $ 246 million maturing on October 18 and Fitch Ratings had already revised the outlook to negative last week.
On Thursday, S & P’s had cut Evergrande’s rating to ‘CC’ and with a negative outlook, due to the “extremely high risk of non-payment” of the debt on time. The move was added to the similar measures decided in recent days by Moody’s and Fitch, again on the basis of a picture in strong and rapid deterioration.
“The case not only of Evergrande but of the whole Chinese real estate sector”, explains Amighini, “was born in 2009. After the financial crisis, faced with the collapse of foreign demand, the Chinese economy needed a prop, and this prop it has been found in the real estate and infrastructure sectors mainly. He therefore decided to flood construction companies with credit through state banks because, although private, these companies actually supported Beijing’s political objectives. For years, not from today, Chinese banking institutions have had these credits in their stomachs ”.
The real estate sector has been the driving force for Beijing’s economic growth in the post-Lehman: investments have represented on average 13.5% of GDP in the last five years, according to Fitch estimates, three times the level of the US economy . Recently, however, Beijing has decided to change course, reducing the enormous financial leverage granted in the past to the construction sector. President Xi Jinping has launched the campaign to moderate the real estate rush by repeating that “the house is for living, not for speculation”. Three limits have therefore been introduced in the activities of real estate companies: a 70% cap on liabilities for assets, a 100% limit on net debt for equity and liquidity to cover short-term debt. Requirements that, in practice, have aggravated even more the credit crisis that Evergrande has been in for some time.
“Unless there is information we are not aware of, we can say that the Evergrande crash will certainly be a disaster but not at all comparable to what happened with Lehman,” explains Amighini. The fears of a maxi-contagion therefore are currently to be reduced. Even according to Chinese institutions, a possible crash, although disastrous, would not have systemic consequences for the national banking sector.
At the moment, however, the government, and in particular the Chinese Communist Party, “cares very little about Evergrande. And if they could, they would leave it to their fate. The party’s goal is to save face, after allowing rivers of money to flow to real estate companies such as Evergrande but not only, ”explains Amighini. According to the Ispi researcher, it is therefore not a question of money, or of too big to fail, but “of image for the party that cannot come out in any way bruised by the real estate crash. Probably the party will put all the blame on the managers, will point them to the public as the only ones responsible for the disaster, but it will not directly save Evergrande by allowing it to continue doing what it has done to date. Because, in the eyes of citizens, it would only fuel speculative behavior with private ends. One of the most probable hypotheses is that of dissolving Evergrande’s house of cards in a planned way, possibly bringing in other companies in the management of certain assets ”.
Of the same opinion are several financial analysts, as well as the Standard & Poor’s agency, according to which “the Chinese government will not provide any direct support to the Evergrande group. We believe that Beijing would be forced to intervene only if there was a far-reaching contagion that would cause the failure of many important developers by posing systemic risks to the economy ”. Also for Barclays “it is unlikely that an Evergrande default will threaten the general stability of the Chinese financial system, which can count on 45 trillion dollars in assets and 30 trillion dollars in loans”.
More than saving the real estate giant, what Beijing will try to do will be first of all to protect the public image of the party, adds Amighini: “When there are such disasters, the party doesn’t think twice about standing up and reacting in the traditional way. Because the party is sacred and priceless, nor is it interested in how much money a private individual can lose, as we have already seen in the case of Jack Ma. the public good in front of all the other interests at stake “.
Beyond the suggestive narrative, at the moment there are therefore very few similarities between the probable crash of Evergrande and that of Lehman in 2008. Moreover, while the securities of the US company enjoyed investment grade until a few days before the bankruptcy, those of the Chinese companies have long been considered at risk of non-payment by the main rating agencies. “Rather, the real estate disaster will be an opportunity to open their eyes, especially for those who have been fascinated by the story of a China finally open to markets”, adds Amighini. “Beijing, from this point of view, has not changed, it has never changed. He understood well how the market works, but then when there are critical situations he wants to govern it according to his rules ”.