Dow, Nasdaq, S&P are facing the heat of Evergrande collapse. Global Debt Funds and Large number of Chinese banks have exposure to Evergrande’s$300 billion debts. Global funds interested in high yielding notes, had been investing in Chinese papers.

Real Estate Debt exposure in Balance sheet of Chinese Banks, is significant in proportion to Chinese GDP. Standing @ approx. 2% of GDP, Evergrande debt resolution is crucial for the Chinese Financial Systems. At this point of time, it is difficult for the market to estimate of the quantum of off-Balance Sheet obligations, however analyst is of the view that real liabilities can be more and inability to pay debt obligations may have a contagion impact on the Chinese financial system and broader Chinese economy, including a possible spill over to Global Financial System. There may be a significant impact on Insurance Industry as well. Investors who have hedged their investment for credit default risk, may knock the doors of underwriter. Trigger event for any large-scale underwriting obligation, may impact the solvency of Insurer. 

Will the company proceed for bankruptcy or will Government intervene to save it. Outcome has to be seen however It is unlikely that Government will save and allow the existing management to continue. Given the strategic depth of the crises, Government may intervene and replace the Board. However, the real problem continues. The crises will bring down the country wide real estate prices, but the related obligations related to assets, will not go down, in fact obligations will keep going up due to recurring nature of interest, mounting on principal debt.

China is one of the big consumers of steel, paints, and other home furnishing items. Many of the countries having direct export of key material to Chinese real estate industry may face a hit.  Chinese economy is closely linked to real estate sector. Real estate activities form part of more than 20% of Chinese GDP. Revenue from sale of land along with the ancillary activities, form significant stream of income to Government. Chinese real estate has been witnessing the signs of cracks. Impact of trade war with United States is visible in the slowing economy and property bubble has been talked about.  Millions of individuals Chinese, lifesaving is invested in the unfinished real estate projects. Failure to get the house will have have a long-lasting impact on saving and investment pattern. Apart from direct exposure it has a huge impact on the related ecosystem.

Incorporated in the Cayman Islands and listed in Honk Kong Stock Exchange, Evergrande has presence in Real Estate, Automotive, Property Services, media streaming, Healthcare, FMCG, Insurance etc. Before the crises Evergrande was part of fortune 500 companies, employing over 140,000.  It had an asset of RMB 2.3 trillion, revenue of more than RMB 800 billion and profits of over RMB 100 billion. Stock has lost significant value since the beginning of the year. 

Earlier subsidiaries of the Company failed to discharge their guarantee obligations of approx. RMB934 million.  In an update filed to exchange, Company has informed that it expects significant decline in sales in September, which may result in the continuous deterioration of liquidity. Company has also informed the exchange that there is no material progress on sale of assets, as was expected by the Company for meeting the liquidity needs. Liquidity become a serious concern, as the revenue from sale of properties is continuously declining, touching the low of RMB 38.08 billion in August. liabilities are continuously mounting and Company has stopped paying interest to Investor and faces serious risk of Bankruptcy.

Any large shake up will fundamentally impact the Chinese economy and have a lasting impact on its growth momentum. China needs huge sum of money to support its Global ambitions, which are riding on the back of growing GDP. Slowing down of GDP along with the big financial meltdown may reverse the Growth Trajectory. For China the current trouble is bigger than Lehman Brothers as Yuan is not World’s Reserve Currency. China does not have infinite resources to pull the economy back on track as was done by the US. US could print dollars and provide stimulus, backed by its status of reserve currency. Though the economic size of trouble in China is half the size of Lehman Brothers, but what makes Chinese trouble bigger is the fact that, China does not have access to unlimited resources, as US have backed by its printing mechanism.  

Bureau Galactik Views