Construction cranes stand near the Evergrande logo at a new housing development in Beijing, Sept. 15, 2021. (AP/Andy Wong)
Economists and research analysts are speculating that China could be headed for its equivalent of the 2008 collapse of Wall Street investment bank Lehman Brothers, which sent shock waves across the U.S. and the world with long-lasting effects.
Chinese developer China Evergrande Group defaulted on its bonds in 2021, triggering mortgage revolts in China and raising concerns about a domino effect throughout the country’s financial system and beyond.
Trouble in China’s opaque $3 trillion banking sector raises the stakes considerably, William Pesek wrote for Asia Times: “The extreme opacity that pervades the industry means that neither investors nor credit rating companies know the true magnitude of leverage in the financial system.”
After China’s breathtaking economic growth in the past 20 years, many economists now predict a long structural downward trend, driven by diminishing contributions from property and manufacturing — traditional pillars of China’s rapid economic expansion, CNBC reported.
Economies that historically exported manufactured goods will struggle to grow, which will cause “big disappointments in populations, more geopolitical problems and more riots in the streets,” said veteran investor David Roche.
“The Chinese model is clearly washed up on the beach with a huge number of legacy holes in it, and it’s not going to take off again,” said Roche, president and global strategist at Independent Strategy, during an interview on CNBC’s “Squawk Box Europe.”
Evergrande sought protection on Thursday under Chapter 15 of the U.S. bankruptcy code, which protects non-U.S. companies that are undergoing restructuring from creditors hoping to sue them or tie up assets in the U.S.
Evergrande asked a New York court to grant Chapter 15 protection for transactions that mostly happened outside the U.S. If courts approve it, U.S. assets of the Chinese company would be protected from creditors trying to dispute its efforts to restructure its $32 billion of foreign-held debt, and resume normal operations.
Evergrande had to file for Chapter 15 protection under U.S. law, Reuters reported, citing unnamed sources familiar with the subject.
Evergrande defaulted on its offshore debt in December 2021, setting off a liquidity crisis throughout China’s real estate sector, Fortune reported. Evergrande lost $81 billion total in 2021 and 2022. This helped drag down home prices in China, further pressuring struggling developers and putting them at risk of default too.
Since mid-2021, companies accounting for 40 percent of Chinese home sales have defaulted, most of them private property developers, according to Reuters.
Most recently, Chinese property giant Country Garden Holdings missed an interest payment last week and is warning of a possible $7.6 billion loss in the first half of 2023.
China’s trust industry, which had $2.9 trillion in assets under management as of March 31, has been a source of funding for property developers for years, Wall Street Journal reported. Trust funds typically raise money from wealthy people and companies to invest in stocks, bonds, real estate projects and other assets.
Zhongrong International Trust, with $108 billion in assets under management at the end of 2022, is the latest cause of concern, recently missing interest and principal payments to public Chinese companies, according to stock-exchange filings. Zhongrong’s parent, Zhongzhi Enterprise Group, owns wealth-management businesses, and more defaults could put numerous companies and wealthy Chinese at risk.
China’s Zhongrong International Trust Co has missed dozens of payments on investment products since the end of July — a sign that China’s debt issues are rippling through the economy and putting global markets in peril, Pesek wrote.
“Markets still underestimate the aftermath of the significant collapse in China’s property sector,” said Economist Ting Lu at Nomura Holdings.
“The worry is that a ‘Lehman moment’ beckons, threatening the solvency of China’s financial system,” said economist Xiaoxi Zhang at Gavekal Dragonomics.
China has become less transparent and the media less free on Xi Jinping’s watch, Asia Times reported.
Some Chinese investors complained on social media that they didn’t get promised payments from Zhongrong and Zhongzhi. Neither company responded publicly and declined requests for comment.
“The China property sector is like a black hole, so many developers have been dragged into it since two years ago after Evergrande,” said Alan Luk, CEO and chief information officer of Winner Zone Asset Management. “The central government has yet to introduce (strong) measures because this is too large a hole to fill.”
The lack of transparency around China’s property sector exacerbates concerns that Country Garden won’t be the last company to delay payment on private onshore bonds, Asia Times reported.
“Unlike banks, which have holding power and are able to roll over credit to wait for an eventual resolution, alternative financing channels such as trusts may default once trust investors are unwilling to roll over the products,” said analyst Katherine Lei at JPMorgan. “The default events may lead to a chain reaction on developer financing, adding stress to privately-owned enterprise developers and their creditors.”
