Evergrande is heading for default. The crisis facing the Chinese property giant has materialized as the company has failed to pay coupons to its investors that were due yesterday.
Beijing leaves Evergrande heading for default
Evergrande has debts of more than $300bn, 2% of China’s GDP. Yesterday it was due to repay $83.5m in interest accrued on offshore bonds. Despite assurances, it seems that it has failed to honour the agreement.
The non-payment has dragged the share price down. Today alone, the value of the shares listed on the Hong Kong stock exchange has fallen by a further 11%.
Moreover, the government in Beijing apparently does not want to intervene, leaving Evergrande to its fate. According to the Wall Street Journal, Chinese authorities have told local officials and regulators to “get ready for the possible storm”.
This means that Beijing expects to face an employment crisis soon, due to Evergrande’s job losses among employees and suppliers. But it will also have to deal with the anger of investors who will lose capital, and that of those who bought property in advance that will never be finished and delivered.
China is said to be moving to try to limit the damage of Evergrande’s default, without committing itself to saving it. This decision was anticipated by President Xi Jinping, who warned that real estate giants must build houses to live in and not for speculation.
The risk of contagion
The whole world is watching what is happening in China carefully, waiting to understand the consequences.
Many banks have investments in Evergrande securities. Credit Suisse, UBS and HSBC are currently reassuring investors. From the European Union, Christine Lagarde of the ECB has said that banks in the eurozone are not very exposed.
Even the chairman of the Fed, Jerome Powell, played down the risk of contagion.
China’s House of Cards
Forbes has reported that real estate billionaire Joseph Lau has disposed of a large part of his stake in Evergrande. If that’s not an escape, it’s a close call.
Robert Kiyosaki, entrepreneur and author of “Rich Dad Poor Dad “, called Evergrande a “House of Cards” that is coming down:
“Real estate crashing with stock market. China’s Evergrande Group cannot pay. Valuation of properties fake. Will real estate crash spread to US? Yes. Great stock and real estate opportunities coming for smart investors. Disaster for foolish investors”.
HOUSE of CARDs coming down. Real estate crashing with stock market. China’s Evergrande Group cannot pay. Valuation of properties fake. Will real estate crash spread to US? Yes. Great stock and real estate opportunities coming for smart investors. Disaster for foolish investors
— therealkiyosaki (@theRealKiyosaki) September 22, 2021
These words suggest that the contagion will happen. Now we have to wait for the technical timeframe (30 days from non-payment) in which Evergrande’s default can be declared. After that, China and the rest of the world will have to be ready to handle yet another storm that could hit their economies.