On Monday morning, Evergrande Group China’s second-largest real estate development group was unable to pay interest on a series of loans to banks in China, likely to become a technical default, and many transactions of onshore bonds It has already been stopped. An important test will take place on September 23, when the company will pay US dollar-denominated offshore bond coupons.
September is a seasonally volatile time in the market and the response of the Lehman shock (September 2009) has led many to presume Evergrande’s failure and spread to the entire banking sector. I will talk about the collapse. I’m not sure about this (yet).
Most investors have been well warned about the collapse of Evergrande (paying cash debt from pre-sold apartments that haven’t been built yet), and some market prices reflect this- China’s junk bond yields are trading at 14%, the highest since the corona virus crisis broke out (Evergrande accounts for almost 15% of junk issuance).
I can’t deny that stockbrokers distribute a list of companies exposed to Evergrande and the wider Chinese real estate market on Monday morning, but the central expectation I have is that the Chinese authorities It is to allow a controlled, cushioned collapse of Evergrande. Banks provide liquidity for feasible projects, and other banks are split into other developers.
This approach may also look at the arrest and blame of its executives, the restructuring of the company (although there is no state bailout), and the injection of liquidity into the financial system. China is unique among the major economies in that it has plenty of room to stimulate the economy.
The beneficial far more interesting than talking about the moment of the “Lehman” is insight to be given to China’s principles and durability collapse of the Ever Grande is trying to build 習近 Xiaoping to us.
Chinese officials do not want three things to happen as a result of careful study of how Europe has dealt with the financial crisis. As a result, China Dream derailed.
If I am correct, this gives a clue as iteration of the Chinese model that Xi Jinping has been shaping to clear from the beginning of this year (which can be expressed as “social democracy” for the Westerners). Crackdowns on business leaders, strategic industries, and economic activities (such as video games and private lessons) that can undermine social cohesion will work. The light of its guidance seems to be to avoid the “public interest,” and thus those that hurt or distract the Communist Party.
To that end, authorities have caused as much financial and social distress as possible to Evergrande and other real estate company owners, executives, promoters, and investors in the company’s offshore bonds to avoid moral hazard. It can be expected to correspond by allocating.
In dictation the context of “Housing is for living” of Xi Jinping, but a wide range of relief from investors can not be expected, if the authorities or not to invest more in social housing, the price is adjusted, buy a young family Housing that may help you (the affordability of housing is just one of the reasons for the low birth rate). The exposure of many to real estate-related wealth management products and the real estate itself partially reflects China’s underdeveloped savings and pension industry, which policy makers can pay more attention to. It is one of the sexual fields (leveling)
It is unclear how the Chinese authorities will deal with concerns in parts of China due to the shift in real estate investment. Efforts are currently being made to curb and shape fallout reports from Evergrande, but social media networks across the country are fueled by this topic.
Given that the contracts behind China Dream are based on the exchange of freedom for prosperity, the negative asset effect can lead to a more angry mass. A wise way to deal with this is, as mentioned above, for authorities to double the idea of social welfare safety nets, even more wise if Evergrande is the first in a series of economic shocks.
Just over a decade after the global financial crisis, it’s hard to write about a credit event like Evergrande without recalling the ghosts of past debt crises. It should be remembered that at some stage the potential for an international debt crisis awaits us, as global debt to GDP is close to record levels. My treatise is that it will happen in 2024, the 100th anniversary of the 1924 Debt Conference. One of the distracting ways early in the coronavirus crisis was to sketch a script about how the politics of the 2024 World Debt Conference would unfold, but could reach Netflix. I think there is almost no.
Also, I don’t think we are on the verge of a debt crisis in 2021 right now. China has too much financial and financial space, allowing central banks in developed countries to respond more and more liquidly to market risk. Overdoing it can cause financial accidents.
The biggest short-term risk is that China is now suffering from a simple negative demand shock, hindering post-COVID recovery, after avoiding a major (domestic-inspired) recession for quite some time. Not only does it eliminate inflation as a market concern (and therefore interest rates remain low).
Let’s see what Monday morning brings.