China’s embattled property developer Evergrande Group has caused concern among investors worldwide. With $300bn (£220bn) owed to its creditors and key debt interest payments due on Thursday, the firm’s troubles have rattled global financial markets.
As the second biggest property firm operating in the largest sector of the world’s second largest economy, it is clear why investors are worried, with some drawing parallels to the 2008 collapse of Lehman Brothers. It also comes as a significant test for China’s president Xi Jinping, as Beijing attempts to curb financial risks and concentrations of wealth while trying to limit the economic impact.
Adam Tooze, a history professor at Columbia University, said that while comparisons to 2008 were being drawn, there were differences. The property market is undergoing a correction which has to some extent been planned, with Xi imposing economic reforms.
“Unlike the disastrous chain reaction at Lehman, this is a controlled demolition, deliberately triggered by the regime,” said Tooze.
“Beijing is doing what critics have been asking China to do for a while – to deflate the housing bubble. It is doing what the west did not do in 2007-2008, ie use regulatory intervention to manage a hard landing short of an outright crash.”
For years there have been concerns raised about soaring levels of corporate debt in China, with rapid growth to more than 160% of GDP. The International Monetary Fund has previously warned the explosion in debt could trigger the next global financial crisis.
On Wednesday, Evergrande moved to placate investors with a pledge to pay $36m (£26m) in interest payments due on its domestic bonds on Thursday. The company is still due to pay $84m on a separate US dollar bond. However, the signal that it has some cash ready for investor payouts helped to lift Asian financial markets.
After opening lower, the Shanghai composite index closed up 0.4% on Wednesday, while the Shenzhen benchmark fell 0.6%. Markets remained closed in Hong Kong and South Korea for the mid-autumn festival.
Against a backdrop of investor concern, China’s central bank announced it would pump $14bn into the banking system. Financial markets around the world rallied on Wednesday, with the FTSE 100 up more than 1%.
“This is not China’s ‘Lehman moment’,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics. “China’s authorities will neither allow a complete collapse, nor risk a financial crisis, to make a point about moral hazard.”
Instead, analysts expect Beijing’s push to tackle indebted companies will follow the route of managed decline, demonstrated by intervention from the central bank. Bondholders are likely to face losses, but homebuyers and suppliers are expected to be protected.
It is not a process without risk. Analysts expect the fallout to weigh down China’s economy, after years of the property sector – which accounts for 29% of GDP – serving as a powerful engine of economic growth. Parallels with a consumer debt crisis in Korea in 2003 are being drawn, when a massive credit card lending boom was followed by a painful bust, holding back growth as households reined in their spending.
“Evergrande is like Lehman in that it has speculated on real estate. It has a lot of debt spread across the entire Chinese economy and Chinese society. It is opaque. It is worrying,” said Tooze.
“But is Evergrande really Lehman? Closer examination suggests that the Evergrande crisis is not like Lehman at all.”