Financial institutions believe that the Chinese real estate colossus Evergrande could collapse at any time, with a debt of $300 billion, wreaking havoc not only on the Chinese economy but the impact would be on a global scale.
The collapse of the real estate giant would have a “domino effect” far beyond China, as noted by the Financial Times: “Evergrande counts big international companies among its investors, including Allianz, Ashmore and BlackRock. A default is likely to have spillover effects on global markets, where many investors have historically anticipated Chinese government support at times of distress.”
Meanwhile, experts assume that the Chinese Communist Party (CCP) will have no choice but to rescue one of its main companies and model of economic growth, a growth that depends almost entirely on “debt,” in this case, colossal debt.
On Tuesday, September 7, rating firm Fitch downgraded Evergrande and its subsidiaries from CCC+ to CC, or “very high” default risk.
The downgrade, Fitch said in a statement: “The downgrade reflects our view that a default of some kind appears probable. We believe credit risk is high given tight liquidity, declining contracted sales, pressure to address delayed payments to suppliers and contractors, and limited progress on asset disposals”.
A day earlier, the rating agencies Moody’s and China Chengxin International had also downgraded their company valuation, and Goldman Sachs recommended selling the real estate giant’s shares.
As a result, its stock price on Wednesday, Sept. 8, fell as much as 3.08%.
Evergrande was founded in 1996, when the CCP decided to move hundreds of millions of Chinese from the countryside to the cities, creating robust Chinese real estate sector growth.
Later, it diversified into other areas, some not so successfully. It acquired stakes in video broadcasting companies, health insurers, dairy farmers, and pig-breeding cooperatives. It also bought Guangzhou FC, a soccer club in the Guangdong region where it is based, and built amusement parks.
The debt is now monumental. Evergrande must pay millions of dollars to its creditors. At the same time, due to the restrictive monetary policy that the government is currently implementing, banks have become much more reluctant to lend them money.
Bubble about to burst
According to the specialized site Moneyweek, Evergrande’s construction company relies on money from pre-sales of the properties it develops to actually build the properties in question.
But due to restrictions by the Chinese authorities, the sales have dried up. Therefore, it cannot finish its properties because it cannot pay its suppliers and therefore cannot raise more cash, i.e., it is a vicious circle.
The credit rating agencies lined up to downgrade its rating, the price of its bonds collapsed, as did its shares.
All indications are that should the Evergrande situation worsen, the CCP will print as much money as necessary to prevent the system from collapsing, recapitalizing banks, and bailing out whoever it deems necessary.
However, if the CCP wants to defuse this financial bubble, it will significantly affect its economic growth. High housing prices or slowdown? That is the current dilemma for the Beijing authorities.