Foreign investors have finally heard the red flags surrounding China Evergrande, a huge developer with $ 300 billion in debt roughly equivalent to Finland’s annual economic output. On Monday, benchmark stock indexes for Europe and the United States went into liquidation over fears of financial contagion, while the trades credit default, China’s sovereign default insurance costs have skyrocketed. It was time.
A bankruptcy of Evergrande and a local real estate correction will be damaging, and not just for the suppliers of raw materials. If a full-blown real estate crisis were to occur, it could cause an unprecedented contraction of the world’s second-largest economy, with implications for all companies that invest in or export things to China.
However, the risk of financial contagion appears limited. Evergrande’s dollar bonds were downgraded to “trash” a long time ago; Chinese promoters’ high yield issues are mostly traded by speculators. The biggest lenders in Evergrande are national banks such as China Minsheng Banking and Agricultural Bank of China. Much of your recent credit comes from paying vendors for commercial paper (unsecured promissory note) instead of cash.
During the US subprime mortgage crisis of 2008, the difficulty of determining who had how much garbage caused banks to stop lending. However, a similar liquidity crisis is almost impossible in China, where the financial system is controlled by the state.
Some foreign trading desks will be affected. Fund manager Amundi said it still has $ 25 million of exposure to Evergrande. Investment bankers who have sold promoter bonds to clients may have awkward conversations with lawyers.
It is also possible that foreign institutions inadvertently assumed the risk of default, given the penchant of founder Hui Ka Yan and his colleagues for opaque and exotic funding channels such as wealth management products.
There may be a silver lining. The historic performance of the real estate sector relative to any other Chinese asset class has overheated demand for mortgages and phantom loans. It has distorted Chinese consumption and investment, cannibalizing capital in stock markets, mutual funds and insurance.
This has hurt foreign wealth managers trying to attract retail investors from China. If this is really the beginning of the end of boom In real estate in the People’s Republic, Wall Street financiers watching Evergrande crumble would be wiser if they brought out the popcorn, not the tissues.