Evergrande: A new Lehman Brothers?
World bags fall to the difficulties in paying the debt of China Evergrande real estate.The company, one of the largest real estate promoters in China, is on the verge of collapse.This Thursday must face interest payments worth 71.6 million euros and there are very high probabilities of default.The company's debt amounts to 255,000 million euros and among the creditors are banks, supplier contractors and even clients who have already paid for homes that have not been completed.Evergrande has 200,000 direct workers, it is present in 280 cities in China and is diversified in sectors such as health, food, television, electric cars and even football.
It is clear that the bankruptcy of the company could generate a serious problem for the country's economy, of difficult consequences to foresee.The first could be the explosion of a Chinese real estate bubble that has been forming for decades of easy credit and has caused serious indebted problems for some companies in the Asian country, as is the case of Evergrande.The real fear is that a situation similar to that produced in 2008 with Lehman Brothers produced in China: Succession of bankruptcies in companies in the sector and infection to the banking sector that leads to a credit crunch or credit contraction that affects the entire economy.From there, the next step in this catastrophic series of events would be the infection of global financial markets.
Anyway, before thinking about this scenario, several factors must be taken into account.Exposure to debt and the direct consequences of the company's bankruptcy is located mainly in China.In addition, the Chinese government, anticipating the possible consequences for the economy, can opt for a rescue, restructuring of debt or measures to avoid a lack of credit in the country.
A disorderly bankruptcy or drop to Evergrande to your fate could trigger adverse effects of unpredictable consequences.The parallelism of the situation with what happened in 2008, when the US Treasury and Federal Reserve dropped Lehman Brothers, is evident.Surely the Chinese economic authorities have this in mind to the possibility of the disorderly bankruptcy of Evergrande.
What there is no doubt is that fear exists and is reflected in the fall of markets worldwide.The company's shares have fallen 10.63% on Monday in the Hong Kong Stock Exchange and there are generalized falls in the banking sector, which have also arrived in Spain.An increase in market restlessness until Thursday is expected, which is the day of the company's interest payment.In this sense, we must be attentive to the possible action of the Chinese government to deal with the situation.
Although there are similarities with the fall of Lehman Brothers in 2008, the phenomenon is not as global as the financial products and toxic assets that were present worldwide and that triggered the 2008 crisis. Many analysts do not anticipate consequences such as those that areThey produced then.It is also believed that the Chinese government will not allow a situation that produces big problems in its economy.
@GWR Sorry I quote tweeted in my excitement... https://t.co/PpqXalo8Rf— STUͣͬͭ ͣ ͬ ͭ Peck🕵️🔎 Tue Sep 25 13:24:47 +0000 2018
On the other hand, Chinese authorities can try to give an example with Evergrande to launch a message to real estate companies so that they decrease their indebtedness, understanding that the fall of the company does not imply a systemic risk for the Chinese economy and that therefore it is notIt would be a rescue.The authorities' plan could be to end highly indebted companies to have robust economic growth in the future.This would link to the idea of Schumpeterian creative destruction of ending companies with imbalances so as not to perpetuate zombie companies that have produced so much damage to the economies of other countries.
Another underlying problem in the situation of China's promoter and real estate, in addition to the high indebtedness, is the fall in the sale of real estate in the country, where demand has been considerably reduced.The Chinese government is aware of the problem of debt of the companies in their country, especially in the real estate sector.Already in past years, measures were taken to stop speculative purchases and price increase in the sector, which avoided excessive credit flow towards housing.For example, last year the sale in advance of promotions was prohibited.These measures have meant serious liquidity problems for companies such as Evergrande.The company has left numerous without finishing projects and the protests of small investors and suppliers before the company's headquarters are common.
Although it is understood that the effects of the bankrupteconomic actors and the abundance of cheap money that facilitates speculation, bubble formation and the delay of structural reforms.Some economists, such as Nouriel Roubini, already warn us of the arrival of a great debt crisis and any economic phenomenon could be the trigger.
As of Thursday we will leave doubts about the effects of the possible non -payment of the company and the action of the Chinese government to solve this problem.
Jorge Hernando brother -in -law is a professor of economy and business at the Nebrija University
Jorge Hernando brother -in -law.Economy and Business Professor.Nebrija University