The risk of an Evergrande prompted contagion event has been speculated upon since August.
Let me start at the beginning, the Evergrande Group, one of China’s biggest private developers which employs hundreds of thousands of workers and supports construction firms and other contractors, is struggling under $300 billion in liabilities, including $20 billion in outstanding US dollar bonds.
Just so we’re clear here, we’re talking about one company that has liabilities to the value of about 20% of the entire Australian economy.
If Evergrande defaults and bondholders are forced to sell other unrelated investments to raise cash, it may impact prices in seemingly unrelated markets – like Brisbane, where construction is rampant right now (just look at our skyline).
Evergrande has borrowed like crazy in recent years to help finance its rapid expansion, including building tonnes of residential developments across China to capitalise on the country’s hot property market.
Real estate activity is massive in China – it’s one-fourth of gross domestic product. But underneath that booming market are plenty of Chinese developers who have been in default of new debt ratio regulations, including Evergrande, following a crackdown on speculative real estate activity. It is thought that around 14 of China’s 30 biggest developers are in breach of the regulations, including the debt riddled Evergrande. Chinese financial regulators have warned Evergrande to resolve its debt issues without destabilising the property and financial markets.
In an effort to prevent the contagion, the Chinese State is said to be dismantling the giant developer slowly and behind the scenes, in what could amount to one of the biggest financial challenges their government has faced in years.
The plan, according to official government statements, is to sell off some Evergrande assets to Chinese companies while limiting damage to home buyers and businesses involved in its projects. But, Chinese authorities must do this without bringing down the country’s epic property boom.
I hope you enjoy the read.