Default by China Evergrande unlikely to spark malaise that threatens China’s financial system, analysts say

[onebyone]

Default by China Evergrande unlikely to spark malaise that threatens China’s financial system, analysts say

• Comparison to collapse of Lehman Brothers ‘far-fetched’, analysts say
• Beijing not expected to take action, Evergrande hit to financial system ‘manageable’, S&P says

A highly anticipated default by
China Evergrande Group
as soon as this week is unlikely to spark a broader malaise that threatens the overall stability of China’s financial system in the same way the collapse of investment bank Lehman Brothers did during the global financial crisis in 2008, according to research analysts.

The
world’s most indebted property developer
is supposed to make a series of interest payments on its debt beginning on Thursday, but S&P Global Ratings and other credit rating agencies said a default is “likely”.

The Shenzhen-based company had some US$300 billion in liabilities at the end of the first half of this year, and concerns about a potential contagion have
sent borrowing costs soaring
for other property developers and
sparked a sell-off in stocks
from Hong Kong to New York on Monday.

“We don’t expect government actions to help Evergrande unless systemic stability is at risk. A government bailout would undermine the campaign to instil greater financial discipline in the property sector,” S&P Global Ratings analysts Matthew Chow and Christopher Yip said in a research note. “Government support to prevent a default is only likely if contagion risks cause other large developers to fail. This could threaten the stability of the financial system and economy. We think the hit to the financial system from Evergrande alone will be manageable.”

The worries about cash-strapped Evergrande’s ability to repay its massive debt load comes as Beijing has been trying to cut borrowing levels in China’s property sector and after warnings by foreign investors about rising debt levels in the mainland.


In August 2020, the People’s Bank of China, the country’s central bank, introduced its
“three red lines”
measures – financial requirements that limit the ability of developers to borrow – as part of efforts to take some air out of speculative bubbles that have driven up residential property prices in recent years.


Despite the headline figure,
Evergrande’s liabilities
, including 227 billion yuan (US$35 billion) in bank loans, is “not large enough to tip the scale”, according to Barclays. China’s banking system as a whole has as much as US$45 trillion in assets and US$30 trillion in loans, the bank said.

“Evergrande’s balance sheet doesn’t seem a good indicator of the entire real estate sector; its liabilities have grown far more rapidly than those of the entire Chinese property sector. And Evergrande’s profit margins have collapsed over many years – which is also at odds with the overall property complex,” Barclays analysts Ajay Rajadhyaksha and Jian Chang said in a research note. “We don’t believe the business model of Chinese property firms is on the whole broken; Evergrande is in worse shape than most, both in terms of leverage and its business model.”



The comparison of Evergrande to the global crisis sparked by the collapse of the US housing market and subsequent bankruptcy of Lehman 13 years ago is “far-fetched”, according to Alexandre Bon, a market risk expert at financial software provider Murex.
“We are not on the doorstep of a Chinese version of the Asian Financial Crisis, but there is a risk of major contagion from Evergrande and a credit crunch affecting financial markets through the real economy,” Bon said.
While Evergrande’s liquidity crunch and its impact on the property sector presents a potential systemic risk to China’s financial system, it is not expected to be a “Lehman moment” for China, according to Citigroup. Any dip in banking stock prices could be an “enhanced opportunity” to buy quality names in the sector, the bank said.

“Policymakers will likely uphold the bottom line of preventing systematic risk to buy time for resolving the debt risk, and push forward marginal easing for the overall credit environment,” Citigroup analyst Judy Zhang said in a research note.

Evergrande default ‘unlikely’ to threaten China’s banking system

An expected default by China Evergrande, the world’s most indebted developer, is worrisome but unlikely to threaten the stability of China’s financial system, according to research analysts.

www.scmp.com

 

[Meliodas]

Actually it's boon for debt finances. All major debt buying institutions are rallying up their investments

 

[S10]

Real estate market needed cooling off 10 years ago. These property developers need to be taken down a notch.

Housing for for living, not for investment.

 

[52051]

If the China doom sayer spend 1/100th time in research, instead of bashing China, they would have known even in their wildest dream, Evergrande group wont do much to China's financial system.

Guess what, for every 1 dollar Evergrande can borrow from any Chinese bank, they have to give out 2 dollar of their assert under the bank's control.

So the debt they own to the bank will be payed off easily.

Thats why Evergrande in last few years issue lots bonds to the oversea investors (unlucky suckers).

And according to China's regulation, in most cases, bank and insure corporations are the the first priority/first class debt owner, so even in the case Evergrande bankrupted, bank and insure company wont hurt.

Besides, the crisis of Evergrande is a liquidity crisis, they still have way more asserts than debts (note that many of their asserts are actually undervalued since by Chinese accounting, asserts like the land they owned is priced at the market value at the time they bought the land adjusted by cash discounting, since most of the valuable land are bought many years ago, thus highly undervalued by today's true market value), the problem is Evergrande's boss still hope China government's rescue package, instead of sell their valuable asserts at a lower price to pay the debt/interests.

Thats why China's government is not very willing to help them, they dont like too-big-to-fails, and actually thats why China's stock market is not affected by Evergrande's liquity crisis.

And actually yesterday, after Chinese government meet the Evergrande officials, Evergrande announced they will pay interests of their debt/bond on time.

 

[MH.Yang]

According to Chinese law, the order in which the bankrupt company pays off its debts is as follows:
1st. Employees' wages.
2nd. Taxes,
3rd. Bank loans,
4th. Customer rights and interests.
5th. Debts of domestic enterprises.
6th. Debts of foreign enterprises.
7th. Shareholders' equity.


With regard to Evergrande's corporate debt, the top eight are Wall Street companies, including the US Department of defense pension fund and the federal pension fund. No. 9 is the Japanese Pension Fund.
Now it is not the Chinese who are most afraid of Evergrande's bankruptcy.

 

[nufix]

According to Chinese law, the order in which the bankrupt company pays off its debts is as follows:
1st. Employees' wages.
2nd. Taxes,
3rd. Bank loans,
4th. Customer rights and interests.
5th. Debts of domestic enterprises.
6th. Debts of foreign enterprises.
7th. Shareholders' equity.


With regard to Evergrande's corporate debt, the top eight are Wall Street companies, including the US Department of defense pension fund and the federal pension fund. No. 9 is the Japanese Pension Fund.
Now it is not the Chinese who are most afraid of Evergrande's bankruptcy.


View attachment 779406

Wow, why would US defense and federal pension funds be invested in Chinese companies?

 

[Menthol]

If the problem lies in China's real estate market.

I guess it's not Evergrande's problem alone, but also many other real estate companies as well.

It has been years since China government try to control the real estate market without seeing the impact on real estate companies.

The problem could be bigger than Evergrande's case.

 

[52051]

If the problem lies in China's real estate market.

I guess it's not Evergrande's problem alone, but also many other real estate companies as well.

It has been years since China government try to control the real estate market without seeing the impact on real estate companies.

The problem could be bigger than Evergrande's case.

Since China's government is way more competent as proved many times before, they actually has policy/regulations way before anyone could think to prevent any of the worst case from happening.

The key policy is China's government control the leverage ratio of property market in an rather insane level:

For instance, for anyone who want to buy a property in China, they have to pay 60% of the value of the property in cash,and borrow at most 40% loans, and that is, if this property is their first ones, and the property is an economic class (less than 140 square meter or so).

For anything else, they have to pay 80% of the value of the property in cash, so at most borrow 20% from bank.

And in most cities, you can at most own 1 properties, and even for the properties you owned you need to prove you have paid tax to the cities for the past XX years.

And if any company want to borrow money from bank, they have to give out about 2X the asserts to bank, in case of default.

So the bank is very safely guarded against any bad loans, especially these loan related to property market, and China prevent any financial derivatives of properties from issuing, all these, unlike you saw in the wild west west.

 

[nang2]

Wow, why would US defense and federal pension funds be invested in Chinese companies?

Diversification. Don't let Yang's message scare you. All pension funds diversify their portfolios to seek higher yield and manage risks. Higher yields are usually achieved by exposing to higher risks. All fund managers know that and they are prepared to take losses. That is a part of their jobs.

Yang is a communist. Naturally he disdains capitalists so he is delighted to see shareholders got burned, much like how they were delighted when CCP confiscated British assets in China when they took over the power in 1949. They quickly got kicked back when Britain refused CCP from using Hong Kong to raise capital without first compensating the lost British assets. CCP had to comply. There is a consequence when capitalists lose their wealth. It will be much harder to borrow from them the next time. CCP thinks they are now so rich that they don't need any capital from capitalists anymore. My guess they are lined up for a repeated lesson in the future. Like everyone else, they never learn.

 

[Beidou2020]

Diversification. Don't let Yang's message scare you. All pension funds diversify their portfolios to seek higher yield and manage risks. Higher yields are usually achieved by exposing to higher risks. All fund managers know that and they are prepared to take losses. That is a part of their jobs.

Yang is a communist. Naturally he disdains capitalists so he is delighted to see shareholders got burned, much like how they were delighted when CCP confiscated British assets in China when they took over the power in 1949. They quickly got kicked back when Britain refused CCP from using Hong Kong to raise capital without first compensating the lost British assets. CCP had to comply. There is a consequence when capitalists lose their wealth. It will be much harder to borrow from them the next time. CCP thinks they are now so rich that they don't need any capital from capitalists anymore. My guess they are lined up for a repeated lesson in the future. Like everyone else, they never learn.

You spew a lot of nonsense

 

[nang2]

You spew a lot of nonsense

You got no counter-argument.

 

[Beidou2020]

You got no counter-argument.

Not interested.

 

[nang2]

Not interested.

Of course, not. You got no reason. Only filled with negative emotion. All you can do is to spill your emotional garbage around.

 

[letsrock]

According to Chinese law, the order in which the bankrupt company pays off its debts is as follows:
1st. Employees' wages.
2nd. Taxes,
3rd. Bank loans,
4th. Customer rights and interests.
5th. Debts of domestic enterprises.
6th. Debts of foreign enterprises.
7th. Shareholders' equity.


With regard to Evergrande's corporate debt, the top eight are Wall Street companies, including the US Department of defense pension fund and the federal pension fund. No. 9 is the Japanese Pension Fund.
Now it is not the Chinese who are most afraid of Evergrande's bankruptcy.


View attachment 779406

Thats a wrong way of looking at it. its also failure of chinese corporate governance and can shake the faith in chinese coporates. It can hit their ability to raise funds. But i cant beleive pension funds will invest in a risky venture. what is the credit rating for Evergrande.

 

[Zsari]

Default by China Evergrande unlikely to spark malaise that threatens China’s financial system, analysts say

• Comparison to collapse of Lehman Brothers ‘far-fetched’, analysts say
• Beijing not expected to take action, Evergrande hit to financial system ‘manageable’, S&P says

A highly anticipated default by
China Evergrande Group
as soon as this week is unlikely to spark a broader malaise that threatens the overall stability of China’s financial system in the same way the collapse of investment bank Lehman Brothers did during the global financial crisis in 2008, according to research analysts.

The
world’s most indebted property developer
is supposed to make a series of interest payments on its debt beginning on Thursday, but S&P Global Ratings and other credit rating agencies said a default is “likely”.

The Shenzhen-based company had some US$300 billion in liabilities at the end of the first half of this year, and concerns about a potential contagion have
sent borrowing costs soaring
for other property developers and
sparked a sell-off in stocks
from Hong Kong to New York on Monday.

“We don’t expect government actions to help Evergrande unless systemic stability is at risk. A government bailout would undermine the campaign to instil greater financial discipline in the property sector,” S&P Global Ratings analysts Matthew Chow and Christopher Yip said in a research note. “Government support to prevent a default is only likely if contagion risks cause other large developers to fail. This could threaten the stability of the financial system and economy. We think the hit to the financial system from Evergrande alone will be manageable.”

The worries about cash-strapped Evergrande’s ability to repay its massive debt load comes as Beijing has been trying to cut borrowing levels in China’s property sector and after warnings by foreign investors about rising debt levels in the mainland.


In August 2020, the People’s Bank of China, the country’s central bank, introduced its
“three red lines”
measures – financial requirements that limit the ability of developers to borrow – as part of efforts to take some air out of speculative bubbles that have driven up residential property prices in recent years.


Despite the headline figure,
Evergrande’s liabilities
, including 227 billion yuan (US$35 billion) in bank loans, is “not large enough to tip the scale”, according to Barclays. China’s banking system as a whole has as much as US$45 trillion in assets and US$30 trillion in loans, the bank said.

“Evergrande’s balance sheet doesn’t seem a good indicator of the entire real estate sector; its liabilities have grown far more rapidly than those of the entire Chinese property sector. And Evergrande’s profit margins have collapsed over many years – which is also at odds with the overall property complex,” Barclays analysts Ajay Rajadhyaksha and Jian Chang said in a research note. “We don’t believe the business model of Chinese property firms is on the whole broken; Evergrande is in worse shape than most, both in terms of leverage and its business model.”



The comparison of Evergrande to the global crisis sparked by the collapse of the US housing market and subsequent bankruptcy of Lehman 13 years ago is “far-fetched”, according to Alexandre Bon, a market risk expert at financial software provider Murex.
“We are not on the doorstep of a Chinese version of the Asian Financial Crisis, but there is a risk of major contagion from Evergrande and a credit crunch affecting financial markets through the real economy,” Bon said.
While Evergrande’s liquidity crunch and its impact on the property sector presents a potential systemic risk to China’s financial system, it is not expected to be a “Lehman moment” for China, according to Citigroup. Any dip in banking stock prices could be

an “enhanced opportunity” to buy quality names in the sector, the bank said.

“Policymakers will likely uphold the bottom line of preventing systematic risk to buy time for resolving the debt risk, and push forward marginal easing for the overall credit environment,” Citigroup analyst Judy Zhang said in a research note.

Evergrande default ‘unlikely’ to threaten China’s banking system

An expected default by China Evergrande, the world’s most indebted developer, is worrisome but unlikely to threaten the stability of China’s financial system, according to research analysts.

www.scmp.com

There won't be any credit crunch either.