When the world began to take notice of the $ 300 billion Evergrande real estate debt crisis earlier this year, some wondered if it would become China’s “Lehman Brothers moment.”
Since then, it has become clear that Beijing is handling the situation in a very different way than how Washington dealt with the bankruptcy of investment banking giant Lehman Brothers at the start of the global financial crisis in 2008.
After Evergrande announced that it may not be able to meet all of its financial obligations, the crisis-hit company defaulted on some of its overseas bonds.
Supposedly now and NTR will or in a process of debt restructuring with the Chinese authorities that may include the sale of some of the personal assets of the founder.
“It’s opaque, but when we talk to our industry contacts in China, no one is surprised,” said Vinesh Motwani of market research firm Silk Road Research, which specializes in Asia.
Evergrande vs Lehman
“The biggest difference between the two is that Evergrande was a train wreck that everyone saw coming,” said Motwani, who was working in the United States as an analyst at Credit Suisse when Lehman Brothers collapsed.
” ‘When politics of the’ three red lines ‘ for over a year, it was clear that Evergrande was one of the worst offenders, so the reaction in China was announced E sto was seen coming a while . ‘”
The “three red lines” are a set of debt thresholds that severely limit the ability of certain developers to obtain loans. For decades, the sector had seen uncontrolled lending, something the central bank (People’s Bank of China) described as “reckless.”
The Evergrande crisis is a “gray rhino” event , a term used to describe an obvious slow-moving threat rather than a surprise “black swan , “ according to Rory Green, director of China and Asia research at the firm. investment adviser TS Lombard.
“The Evergrande warning has been around for a long time, so none of the bondholders should be surprised that they are in default,” he said.
Why is this crisis so different?
Another big difference between the collapse of Lehman Brothers and the Evergrande crisis is that when the US government needed to act it had to pass legislation to have the power to intervene, something that is not a problem for the Chinese government.
By controlling the country’s housing market through state-owned banks, Beijing also knows which developers are likely to default, something that could not have been said about Washington during the subprime mortgage crisis.
At the same time, China is being much more selective in its actions than the United States during the global financial crisis. Unlike Washington, which bailed out some of the world’s largest banks, the Communist Party of China is taking a more fragmented approach.
“Beijing is like a surgeon who operates on a tumor and thinks, ‘What do I need to save?'” Said Alicia García Herrero, chief economist for Asia-Pacific at investment bank Natixis.
For the Chinese government, it is crucial that Evergrande’s day-to-day operations remain intact. His goal is to ensure that the company can finish the houses it is building so that ordinary property buyers are not affected and confidence in the real estate market is not seriously damaged.
“Beijing also needs to be looking at the heart, see if it is still beating. That is the perception of the people about the real estate sector,” added García Herrero.
So far, this approach appears to have limited the impact on the housing market, according to Motwani: ” Real property prices keep going up year after year . Even when they have fallen month over month, they did not go down by double-digit percentages.”
There are also concerns that if prices continue to fall, potential buyers may postpone buying new homes, further slowing the market.
What will happen to Evergrande?
Experts predict that the restructuring of Evergrande could take months or even years, so there will be few ads hogging the headlines while authorities try to avoid l a concussion or n of l global financial system after the collapse of Lehman Brothers .
Green points to the failures of large Chinese companies in the past. Using the implosion of financial and insurance giant Anbang as an example, he expects the restructuring of Evergrande to be a long process: “Anbang went into restructuring two years ago and is still ongoing. Evergrande is much larger, so it could take years. But, in my opinion, the worst is over. “
“The most likely scenario is that Evergrande is divided into separate units. It will be the destruction of the gray rhinoceros, and regional banks will be tasked with dealing with those separate units to ensure the stability of the sector and the economy,” he said.
Will international investors freak out?
Although Evergrande’s default on foreign bond interest has not triggered a financial meltdown, as they are mostly in the hands of powerful global investors, some analysts are concerned about the impact on the sector’s reputation. Chinese real estate.
“It definitely hurts international investors’ faith in China’s overseas real estate bonds,” said Jackson Chan of financial market research platform Bondsupermart.
Crucially, this made it much more expensive for Chinese property developers to borrow money from international investors.
What remains to be seen is how Beijing strikes a balance between continuing its strict housing market policies and the risk that the country’s huge real estate industry will lose access to affordable foreign investment.