The Evergrande Saga – The Biggest Real Estate Meltdown In China
A brief introduction about the Evergrande developer meltdown currently happening in China and may be set to impact markets across Southeast Asia.
The liquidity woes of Evergrande may spread to Southeast Asia property markets and construction supplies even if financial risks are contained. There is growing concern if Evergrande and other property developers come under pressure and default on Southeast Asian overseas projects and suppliers.
BOXED: Who is Evergrande?
It is a Shenzhen-based developer that employs about 200,000 people and creates 3.8 million jobs each year. Founded by billionaire Xu Jiayin who was once the richest man in Shenzhen. Evergrande boasts to own 1,300 projects in more than 280 cities across China. It even invested in theme parks, electric vehicles, owns F&B businesses, selling bottled water and groceries across China. It even bought a soccer team at a cost of USD 185 million in 2010 which is now known as Guangzhou Evergrande. It was poised to construct the world’s biggest soccer stadium shaped like a lotus flower and will accommodate 100,000 spectators. Troubles surfaced when its debts ballooned and are now purported to have more than USD 300 billion worth of liabilities. So far, Evergrande shares have crashed by almost 85 per cent in 2021. This has caused the Chinese government to step in to help. The People’s Bank of China has offered a cash injection into the financial system to help boost liquidity. A Bloomberg report cited some 460 billion yuan (USD 71 billion) is expected to be injected by this week, then another 70 billion yuan (USD 10.8 billion) by 1 Oct 2021.
To get a sense of this financial meltdown: The Chinese property developer has as liabilities is close to 2 per cent of China’s GDP, clearly dwarfing the cash it holds on hand. With its growing daily debt, Evergrande is on a slippery slope to financial stability, coupled with rising cost in land prices, and that the fact that the Chinese government is cooling China’s hot property market, does not bode well.
It seems like history is repeating itself. Analysts fear it could turn into a Lehman Brothers situation, where the world’s second-biggest economy could suffer from a mountain of debt that Evergrande is in.
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Meeting Strict Requirements
In August 2021, a series of financial metrics deployed by the Chinese government to improve the financial health of property developers and cool lending to developers failing three so-called “red lines”, was an impediment to Evergrande. Undoubtedly, the firm did not pass all three red lines. The repercussions of Evergrande defaulting may pose a systemic risk to the Chinese banking sector is improbable for several factors.
Firstly, Evergrande’s borrowings tallied 571.8 billion yuan (USD 89 billion) as of end-June, hardly constitutes half a per cent of China’s total yuan loans of 186.7 trillion yuan as of August 2021.
Secondly, based on a stress test conducted by the Peoples’ Bank of China to stress test Chinese banks proved that the entire banking system could withstand financial shocks but has also become robust over the past year.
Based on the test, findings also revealed that three of 30 large and medium banks are expected to crumble under these stress tests, down from nine from last year.
Thirdly, many Chinese banks have been cutting their risk to property loans since 2020 according to a JP Morgan report.
However, the much bigger concern is putting pressure on investors because as Evergrande’s woes broaden to China’s real estate sector, it could weigh down on Chinese property developments overseas, not forgetting foreign investments that have taken root in the industry. While Evergrande has no projects in Southeast Asia, there are other Chinese developers who have been black-listed by Chinese authorities who have expanded into the region in recent times.
One of the casualties of this “red line” fallout is China Fortune Land Development (CFLD). It is the first major Chinese developer who defaulted on USD 3.6 billion worth of bonds since the beginning of this year but has also dabbled in many big Indonesian projects since 2015.
Under the microscope of Moody’s, Guangzhou R&F properties have been downgraded as it faced funding stress and has begun liquidating assets to boost its cash. This firm has residential projects in Malaysia such as Princess Cove luxury condominiums in Johor Bahru, Malaysia.
Another casualty is Country Garden which happens to be China’s largest property developer by sales. The firm violated one of three red lines and has a handful of projects in Malaysia and Indonesia. Over in Singapore, none of the Chinese developers – four of the largest in fact – thankfully have not violated any red lines. These include Logan, QingJian, Kingsford, and CSC Land Group. Their land bids total some SGD 8 billion.
While growth for trade and economy might be affected because of the slowdown in the Chinese property market, it will still pose a risk to Southeast Asian suppliers. News of late payments to suppliers dogged Evergrande’s reputation. Its trade and payable grew by 15 per cent from December 2020 to an eye-watering 951.1 billion yuan in August 2021. More troubling is when overdue payments are more than 180 days late, which have doubled to 67 per cent in 2020, thereby spiking credit risks, as cited by a May 2021 China Corporate Payment Survey report done by credit insurer Coface.
The producers of construction and building materials and even manufacturers of electrical machinery in Southeast Asia are not spared from the melee because there would be a negative impact on the Chinese housing sector. This puts their credit positions in jeopardy. Just to give you some perspective of the far-reaching ramifications: China imports more than a quarter of Thailand’s plastic and rubber products, and its demand for metal and wood exports from Indonesia is about 25 per cent, to name a few.
Trade Demand Plummets
The slowdown in China’s housing market can also affect its trading partners. As the real estate market is pivotal for China’s growth, let us not forget that the related sectors such as construction and manufacturer of machinery could also take a beating.
So, it will funnel down to household consumption if home prices head south as real estate stems from 70 per cent of household wealth. This could send economic shockwaves to Southeast Asia as trade grinds to a halt.
In 2020, Southeast Asia took pole position as China’s biggest trading partner, putting the European Union in the second position. While the pandemic shrinking global merchandise trade, the bilateral trade between China and ASEAN climbed 7 per cent from 2019 to USD 731.9 billion at the expense of China’s trade with some of its major trading partners.
It is because that Singapore has relatively greater trade flows with China than its neighbouring countries such as Thailand and Malaysia, the Little Red Dot will be most affected. Vietnam will also suffer from China’s real estate deterioration. Evergrande is a juggernaut and its fall will clearly spell trouble for Southeast Asia. The plot is further thickened when most countries battle the pandemic and face lockdowns.
In the coming weeks, Evergrande will have to make an interest payment of nearly USD 84 million that was due 23 September 2021, and thereafter, it will have to make another bond payment by next week.