Why are investors worried about Evergrande? ‘Resolved’ debt payments calm markets but fears remains as China crisis rumbles on
- Fears of Evergrande default sent stock markets into turmoil early in the week
- News indebted property developer has ‘resolved’ payments calmed investors
- But uncertainty on the outlook remains as foreign debtors await update
Global investors breathed a sigh of relief after China’s teetering real estate giant Evergrande confirmed it had ‘resolved’ interest payments for a significant portion of its $300billion debt pile.
But while the People’s Bank of China’s injected 90 billion yuan (£10.2billion) to the banking system in efforts to further reassure investors, risk and uncertainty remain about Evergrande’s future – and the unknown extent of the potential impact it could have on the global financial system.
Fears of Evergrande’s demise led some to describe the situation as ‘China’s Lehman moment’ in reference to the collapse of the 171-year-old bank that helped the global economy plummet into crisis in 2008.
Others have suggested that the fallout would be far more contained, but admit that the opaque situation is hard to read, with Evergrande having links that run from property, to bottled water and a branch out into wealth management products sold to Chinese savers.
Evergrande’s debt crisis sparked fears of a default that couple have global consequences
The crux of the fear comes down to the risk of ‘contagion’ – the spread of an economic crisis from one market to another – which sparked a widespread sell-off in global equity markets earlier in the week.
Banks and businesses with large Asian exposure or operations were hard hit on Monday, while UK miners also saw a sell-off.
So why would a Chinese property firm’s wobble effect a UK miner? The Chinese property sector is a heavy consumer of commodities and is estimated to be responsible for the consumption of around 20 per cent of the world’s steel and 20 per cent of its copper, according to analysts at Liberum.
The FTSE 100 and 250 rose on Wednesday as fears were eased, and London copper prices moved higher.
Evergrande: A tangled web from property to water and ‘savings’
Evergrande is a property developer. But it is a property development firm that has also expanded into electric cars, insurance and bottled water.
It even bought a football club based on the notion that General Secretary of the Chinese Communist Party Xi Jinping might approve.
A short time ago it was one of the world’s most valuable listed property stocks, but now holds the crown for most heavily indebted property company globally. It has become symptomatic of a Chinese property sector that has continued to borrow to build, and thereby drive Chinese economic growth, even where there has been no real demand.
Evergrande reportedly owes more than 128 banks and more than 121 non-bank institutions, in addition to the money it owes employees and suppliers.
To help plug its funding gap, in 2019 Evergrande started to fundraise through the shadow banking market, issuing so-called ‘wealth management products’.
It is understood that more than 80,000 customers, employees and their families were convinced to buy these WMPs, which were categorised as fixed-income products suitable for ‘conservative investors seeking steady returns’.
WMPs are understood to have raised more than 100 billion yuan in the past five years, according to Reuters, with potential investors offered gifts such as Dyson air purifiers and Gucci handbags to lure them in.
However, the Evergrande crisis is far from over.
Little is known about what agreement Evergrande has come to with its debtors to pay the $83.5billion (£61.2billion) in interest payments due on Thursday, and even less is known about its intentions with regard to its ‘offshore’ debts – those owed to foreign investors – due on the same day.
Evergrande reportedly has around $20billion of debt outstanding on offshore markets.
Banks and other financial businesses globally have built exposure to Evergrande, both via direct loans and through indirect investments, and its role within the Chinese system means its collapse could send shockwaves through the country’s economy.
Managing director at Chelsea Financial Services Darius McDermott said there will be ‘implications’ for real estate, the shadow banking sector and ultimately sentiment, ‘but a lot will depend on what action the Chinese authorities take’.
He added: ‘They won’t let the Chinese market or even the global market collapse, so I don’t think it’s a “Lehman moment” as some have said, but investors will be looking closely at what happens over the next couple of days
‘Certainly in the short term, the Chinese market could suffer as we see which other companies might be impacted.’
Cutting Chinese growth forecasts over the next three year in relation to the Evergrande developments, analysts at Bank of America on Tuesday agreed that the level of disruption would relate to how well the crisis is handled,
‘Any further delay in policy response from the fourth quarter of 2021 to the first quarter of 2022 or mishandling of a major debtor default would potentially raise the risk of growth dislocation.’