Evergrande, the Chinese real estate giant that shakes the international financial markets...(EN/FR)
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For several weeks now, the financial world has been shaking at the name of Evergrande, China's second largest property developer. Its level of debt is reaching unprecedented highs and threatens the entire macroeconomic balance in a world still suffering from the consequences of the pandemic.
Could Evergrande be the source of a new speculative bubble like the 2008 one ? ...
The Evergrande Group...
Founded in 1996 in Guangzhou, Evergrande was listed on the Hong Kong stock exchange in 2009. This Chinese property developer has been particularly ambitious and has taken advantage of the intensity of Chinese urbanization to establish itself.
However, Evergrande is not just a property developer, this behemoth owns 46 million square meters of construction land and is present in 280 Chinese cities. Evergrande also owns China's largest football club, Guangzhou Football Club, has businesses in water supply, healthcare, insurance, digital, shopping malls and car manufacturing.
So Evergrande is not just a construction company but a colossal conglomerate with diverse activities.
What threat does Evergrande pose to the global economic and financial system ?
Since its creation, Evergrande has borrowed billions of dollars from international banks and investors to carry out its highly ambitious projects in more than 200 Chinese cities. But from mid-2020, the group is lowering the prices of its flats in order to generate profits despite the health situation that is hitting the real estate sector with particular intensity.
Despite its efforts, Evergrande's profits in the first quarter of 2021 fell by 30% and its share price has dropped by 90% since the beginning of the year.
On 13 September 2021, the real estate giant was facing a debt of $300 billion (€260 billion) and management announced that it was facing "unprecedented difficulties". The cause was the pandemic that led to the closure of its shopping malls and the stoppage of its 800 construction sites, which represent more than 1 million homes already paid for by the Chinese middle class...
At the same time, Beijing decided to fight against real estate speculation thanks to measures prohibiting Evergrande from taking on more debt, which until then had allowed it to artificially perpetuate its activity.
According to the Wall Street Journal, it is one of the "most indebted companies in the world". The management has had to reinforce its security in front of its offices because of the demonstrations by suppliers, customers, and subcontractors to whom the Group has multiple obligations.
Is a response from Beijing to be expected ?
In a country where 30% of the economic activity is based on real estate, a bankruptcy of this behemoth, whose debt represents 2% of the GDP, could have serious consequences.
However, Beijing's reluctance to come to Evergrande's aid in a clear manner is of great concern to international financial markets: by letting Evergrande collapse, China would be proving its determination to reduce debt. Indeed, despite all Evergrande's difficulties, the Chinese authorities are reluctant to undermine the policy against speculation in the real estate sector that was put in place mid 2020.
Although rich enough to repay the group's debt, the case has taken on a political dimension that could lead to sanctions against the group's managers.
However, Beijing cannot take the risk of a generalized crisis either and has therefore set up a system of state aid. State-owned companies have been asked to take over the assets of the Chinese real estate giant and the Chinese Central Bank has injected liquidity to unblock the situation. The Central Bank also instructed financial institutions not to use real estate as a short-term economic stimulus and thus to stabilise land and housing prices.
A Chinese property bubble on the model of the subprime bubble ?
Beyond the group, it is the good health of the entire Chinese real estate market that seems worrying. For nearly 20 years, the authorities have maintained a system aiming at increasing prices, which allowed them to finance themselves through the sale of construction land. This inflation of real estate prices, which is real, has caused a decorrelation between supply and demand, a typical mechanism of speculative crisis.
As Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, explains: "Even though debt is rising, Chinese households still have more savings than debt. As there are few investment opportunities, most savings go into real estate”. For decades, Chinese demand has outstripped supply, but recently the trend has reversed. The Chinese authorities regularly intervene to keep prices high, which explains the absence of a bursting speculative bubble accompanied by a fall in prices.
However, since 2015, in China's largest cities, it takes more than twenty-five years of the average salary to buy a flat and thirteen years, on average, throughout the country, according to 2019 figures.
Finally, the group's difficulties highlight concerns about the ability of other property companies such as R&F Properties and Fantasia Holdings to take on such levels of debt. That is reminiscent of the contagion that Lehman Brothers caused when it went bankrupt.
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