Something is happening in China and the markets do not like it.
Chinese homeowners protested recently in Guangzhou after China’s second-largest property developer, Evergrande, showed signs of debt distress when it failed to pay investors on an $83-million dollar-denominated bond.
Furious retail investors who helped fund Evergrande’s expansion turned up at the company’s Shenzhen headquarters to complain about delayed repayments on wealth management products.
The real estate conglomerate is just one of the large Chinese firms have collided with local authorities flexing the ruling Communist Party’s muscles under President Xi Jinping.
Tech giants Alibaba Group Holding and Tencent Holdings have been the target of sudden regulatory crackdowns that wiped out tens of billions of dollars in market value this summer.
Analysts expect the effects of Evergrande’s imminent collapse, caused by more than $300 billion in liabilities, to reverberate through China’s economy and global markets as the largest-ever debt default unfolds by a company in Asia.
Experts have characterized the firm’s struggles as a major test for Beijing that risks turning into China’s Lehman Brothers moment, sending shockwaves across the world’s second-biggest economy.
The conglomerate’s downfall has been touted by some analysts as “the biggest test that China’s financial system has faced in years.”
“The root of Evergrande’s troubles — and those of other highly-leveraged developers — is that residential property demand in China is entering an era of sustained decline,” wrote Mark Williams, Capital Economics’ chief Asia economist, in a note.
“Evergrande’s ongoing collapse has focused attention on the impact a wave of property developer defaults would have on China’s growth.”
Here are seven things you should know about events in china that could rattle risky assets investors and send shockwaves across global markets.
Evergrande is one of China’s largest real estate developers and is part of the Global 500. This means that it’s also one of the world’s biggest businesses by revenue and has a lot of international investors buying its shares, bonds and products.
Outside housing, the group has invested in electric vehicles, sports and theme parks. It even owns a food and beverage business, selling bottled water, groceries, dairy products and other goods across China. In 2010, the company bought a soccer team now known as Guangzhou Evergrande. That team has since built what is believed to be the world’s biggest soccer school, at a cost of $185 million. It’s currently working on creating the world’s biggest soccer stadium.
Evergrande said in a filing with the Shenzhen Stock Exchange that issues regarding a payment on a domestic yuan bond have been “settled through negotiations.” The amount of interest it owes on the bond is about 232 million yuan ($36 million), according to data from Refinitiv.
The company’s aggressive ambitions are what landed it in hot water, according to experts. Moving into other businesses including electric vehicles, sports and theme parks, took away the focus of the company. Its electric car investment is struggling and its larger-than-life sports investment is now in doubt over the ongoing crisis that has meant all its real estate projects have been halted.
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Over the last few weeks, Evergrande has warned investors of cash flow issues, saying that it could default if it’s unable to raise money quickly. That warning was underscored last week when Evergrande disclosed in a stock exchange filing that it was having trouble finding buyers for some of its assets.
Last year, a slew of Chinese state-owned companies defaulted on their loans, raising fears about China’s reliance on debt-fueled investments to support growth. And in 2018, billionaire Wang Jianlin was forced to downsize his conglomerate, Dalian Wanda, as Beijing clamped down on firms borrowing heavily to push overseas expansion.
Global fund managers including BlackRock, UBS and HSBC Holdings have been increasing their holdings of the debt in Evergrande even as its bonds fall towards $0.25 on the dollar amid worries the real estate giant will default. These fund managers are attracted by its “widening spreads and attractive valuations,” said Patrick Ge, a research analyst at Morningstar. “This is in line with what we have heard from some managers where they said that at its current levels, they believe Evergrande is a buy.”
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