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Macroscope | Why China’s handling of the Evergrande debt crisis should cheer markets
- It is encouraging to see authorities taking a market-oriented, rules-based approach towards managing events such as the Evergrande default
- Even in a volatile global environment, China is sticking to a steady policy mix aimed at providing stability
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Evergrande, once China’s largest property developer by sales, last week indicated its inability to meet guarantee obligations on its US dollar debts. Since then, Guangdong and other provincial governments where Evergrande Group and its affiliates have housing projects have announced they are providing advice and guidance, indicating a restructuring process will be handled in an orderly manner according to the law.
The China Banking and Insurance Regulatory Commission also issued a press release, noting that an Evergrande default will not have negative impact on the operations of China’s banking and insurance sector.
When news of Evergrande’s difficulties in meeting its obligations surfaced, some analysts suggested a default could be China’s “Lehman moment”. This implied there could be systemic contagion along the lines of the cascading failure of Lehman Brothers, which triggered the 2008 global financial crisis.
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Although Evergrande’s debt is large at about 2 trillion yuan (US$313.7 billion), its financial debts account for around a third of its total liabilities with a diversified creditor structure. The larger amount owed outside the banking sector is because of the peculiar funding structure of China’s real estate model.
Chinese property development typically relies heavily on presale deposits from buyers and mortgage instalment payments to fund their housing development projects. The exposure to domestic financial institutions is relatively low and more diversified because of the regulatory restrictions within China on credit concentration.
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World’s most indebted developer, China Evergrande Group, buys time to repay more creditors
World’s most indebted developer, China Evergrande Group, buys time to repay more creditors
Some Chinese property developers have relied on US dollar bonds, issued mainly in Hong Kong, to meet their funding needs in recent years. They pay market interest rates on bonds with credit ratings. Since many such bonds are rated below investment grade, the market is transparently assessing the risk-reward balance for such credits.
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