A liquidity crisis at a major China real estate developer has rocked global markets, and strategists say it could have multiple ramifications for the global economy.
But they also say that the Chinese government can “cover the sky with one hand” to avoid damaging the banking system and hopefully not to expand to the wider global financial community.
The crucial question for investors is how and when the executives in Beijing will get the situation under control and whether they will initiate a restructuring of the China Evergrande Group, as many market experts are doing.
In addition, investors are concerned about the possibility that the Beijing government will allow companies to “self-destruct,” harming domestic shareholders and bondholders. Evergrande faced foreign bond payments Thursday after announcing unprecedented trouble last week.
Jimmy Chang, Chief Investment Officer, Rockefeller Global Family Office said:
“Everyone expected a solution from the government because Evergrande is a systemically important company. Your outstanding debt is $ 300 billion. The consequences could spread like an epidemic if Evergrande’s problems were left unsolved. I think the ultimate solution is for some state-owned corporations with ample capital to take the lead. ”
Market experts say Evergrande won’t lead to the next financial crisis, but it could add more volatility.
Rick Rieder, Global Fixed Income Investment Director at BlackRock said:
“The hard part about learning about China specifically is that the system isn’t clear and sometimes you don’t have an answer until you get one. The banking system tends to be controlled by the government and there may be government intervention.
I think if you combine this with everything else over a period of time, there will be short-term financial problems with some other real estate institutions that can lead to volatility and some financial dispersion. In my opinion, the government will act and the situation will stabilize. ”
Rieder said it is possible that China’s real estate and multi-industry companies will act cautiously in the near future.
There are concerns that the already declining Chinese economy will be further adversely affected and that money will flow to other economies.
Chang said the Chinese government needs to act quickly as Evergrande begins to sway sentiment after being ignored by world markets.
“It could be a self-fulfilling prophecy. Real estate is of great importance to the Chinese economy and the finances of many households. Home ownership over 90%. Many people buy apartments as an investment. If the liquidity problem is not completely resolved, it can turn into a real black swan. ”
The reality is that China’s economy is so big it could affect the rest of the world, Chang added:
“If China has a serious economic problem because of Evergrande, the rest of the world economy will suffer too.”
As Bitcoin magazine The Dow Jones Industrial Average closed Monday’s session by more than 600 points after equity markets collapsed in Europe and Hong Kong, as well as other parts of Asia. The 10-year government bond yields reversed, with prices dropping as low as 1.297 percent as investors sought security on the bond. And not just stocks, the crypto market also had a bloody day, with Bitcoin losing over $ 5,000 and ETH over $ 1,000 in an hour. Other cryptocurrencies also posted double-digit losses in the past 24 hours.
Protect the wider financial system
Mark Williams, Chief Economist for Asia at Capital Economics said:
“I think at some point the Chinese authorities will step in to ensure that at least the broader financial system does not fall into crisis. If you are a real estate developer, you have some gritty months ahead of you. In my opinion, the main difference is that the policy is leaving substantial losses to the real estate developer, but immediately making sure that the banking system is healthy. ”
Jim Chanos, president and founder of Kynikos Associates, said this was a critical moment for China’s leadership to crack down on internet companies, education companies, games and other industries.
Chanos said seeing how Beijing reacts to Evergrande was an important issue.
“We’re seeing a change in attitudes … the way the government treats companies, business leaders and investors in the West. How are they going to deal with a bailout that everyone believes is coming, in some form? Will Western Bondholders Be Saved? Is it only for property owners who owe Evergrande homes that have not yet been built? Banks suffer expected losses?
Pain in the China Real Estate Market?
“China has tried four times since 2011 to contain speculation in the real estate market. Every time the economy slows down very quickly. The authorities must remove the obstacle and step on the gas again, ”emphasized Chanos.
He said that the residential real estate market accounts for 20% of China’s GDP, while total real estate activity accounts for about 30% of its GDP.
“These are extremely high numbers and they have gotten worse instead of better under President Xi Jinping. We don’t think it will affect Western financial markets. ”
Chanos said it was shorting Chinese stocks.
According to Williams at Capital Economics, there are around 1.4 million property owners who have made a down payment and are waiting for Evergrande to hand over the property.
“We don’t know if they can finish these apartments, but it seems unlikely. Some residential areas have been started and are in different construction phases. ”
The risk is that when other property companies get into trouble, property values will suffer and cause turmoil in the housing market. Consumers are a major player in the Chinese economy and a blow to the property market could affect consumption.
It will spread to other global and regional markets as well as the Chinese import market weakens and the demand for all types of raw materials fades.
“When you combine it with some regulatory changes in China, both growth and demand for raw materials are obviously slowing down. But China’s economic growth and its interdependence with the world economy are so great that China’s central role in the market is not going to go away anytime soon.
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According to CNBC