Crac Evergrande in China: from collapse to controlled demolition?

Crac Evergrande in China: from collapse to controlled demolition?
Crac Evergrande in China: from collapse to controlled demolition?

Even today the People’s Bank of China has pumped more money into the financial system, fearing that the contagion will seriously impact the liquidity of the market, in an attempt to remove the feared specter of the “credit crunch”, the credit crunch, or a restriction of supply. credit from financial intermediaries (especially banks) to customers (especially businesses). By now, in the last five days alone, the Chinese Central Bank has intervened with a total short-term liquidity injection into the banking system equal to 460 billion yuan net (71 billion dollars). An already enormous state intervention – on a “Chinese” scale, let’s say – which, however, does not seem to have cheered creditors, investors and the market that much.

In the last few hours, the monetary authorities of Beijing have spread very worrying signals, with the exhortation to “prepare for the possible storm”, as the input from the central government to local government agencies and state-owned enterprises is to intervene only at last minute, in the event that Evergrande loses control of the situation. And the numbers of the collapse of the Chinese real estate giant paint an increasingly disturbing scenario. The stock plunged 82% this year, writing off about $ 20 billion in market value, as offshore bonds are trading at near-default levels. Equity holders could literally be wiped out in the giant crash, while bondholders, for their part, are already pulling their hair out. Gathered for days, they besiege the company’s headquarters in Shenzen asking to get back the money from their investments. By now they understand that their future is sealed, as Evergrande’s status as a private enterprise precludes any direct state intervention to meet its obligations to equity and bond investors.

The scenario is one that sees millions of enraged homebuyers, while the failure to deliver the new homes promised to investors could trigger an event not only economically, but also politically destabilizing for China. Evergrande has sold more than $ 100 billion of properties in one year. Its default could drag a large part of the related industries – that is many of the commercial counterparties that form the company’s supply chain – into the abyss and increase bad debts, while a delay in the delivery of homes could also have very significant social implications. . It is now clear that what can await us in the coming days is some form of “government facilitation”, to maintain order during an inevitable debt restructuring through a “controlled demolition” of the real estate giant.

Evergrande is the first major victim of Beijing’s so-called “three red lines” designed to reduce unsustainable debt levels in the real estate sector. And saving the most indebted real estate company in the world – with over $ 300 billion in liabilities – would send the wrong message, undermining the discipline that Beijing hopes to impose in the sector through the red lines, namely: a ceiling of 70% on liabilities. a limit of 100% of the net debt on the net assets and a cash-to-short-term debt ratio of at least one. Evergrande violated them all.

But while a state bailout is out of the question, as noted, China also wants to avoid an uncontrolled collapse. To preserve social stability and “common prosperity” – so dear to Xi Jinping – we need to look after the interests of tens of thousands of investors, who have purchased the company’s high-yield asset management products and unfinished apartments. . And then there are legions of creditors, including foreign holders of its bonds, whose yields have plummeted to around 30 US cents. It is true that the Chinese authorities have shown that they know how to manage the debts and finances of large conglomerates in crisis, such as Anbang, HNA, Tomorrow Group, Dalian Wanda and the CEFT Group, but here we are facing a very different, and worse situation. . HNA, in particular, operated a large global portfolio, with the largest stake in Deutsche Bank at a quarter in Hilton Hotels: after nearly four years under state control, it was dissolved just this week, after being split into four separate businesses. following its bankruptcy restructuring.

And in the last few hours it has been learned that two senior executives of the group – HNA (and China Hainan Airlines) founder and former president Chen Feng, and former CEO Adam Tan Xiangdong have been arrested by Chinese police for “suspicious crimes. “, And a last minute statement where Chen performed in a public” mea culpa “worthy of a real” self-awareness session “in perfect Maoist style was not enough to save them from the heavy hand of the Party, declaring verbatim : “We must review the hard lessons learned in recent times following the instructions of the Party, and understand that it was the party and the nation that gave HNA the chance to be born and prosper”.

This time the management of Evergrande’s fall will not be painless, let alone without risk, not only for the size, but above all because I will not be an isolated case. China has eight of the 10 most indebted real estate developers in the world, and the Dragon real estate sector accounts for about 29 percent of the country’s economic output. It was precisely in response to unsustainable debt levels and the absolutely irrational and excessively preponderant economic weight of real estate that Beijing decided to draw a line in the sand, or rather three: the red lines, in fact. The nation is moving further and further away from the sector to pursue other avenues, such as hi-tech manufacturing and green technologies, seen as new, more promising and more sustainable engines of growth.

Only today has the news leaked that, for several weeks, both the Ministry of Housing and that of Urban-Rural Development have instructed their local branches to enter funds for real estate projects in special escrow accounts. , in which the money is temporarily deposited in the account of a neutral third party, until the contractual clauses are fulfilled, effectively blocking them. A clear sign that the protection of small investors and homeowners is at the top of the government’s list of priorities in managing the Evergrande crisis. And as China’s largest corporate restructuring ever gets closer, international rating agency Fitch today cut China’s growth estimates for 2021 from 8.4% to 8.1% … .

A perspective that also personally worries Xi Jinping, faced with the real risk that his greatest fear will become a reality: the growth of popular discontent in a politically very delicate moment for him, now about to face the so-called “transition period” towards the next Communist Party congress at the end of 2022, which should entrust him with a third term as general secretary.

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