It has been clear since then that Beijing is managing the situation in a completely different manner to Washington’s handling of Lehman Brothers’ bankruptcy in 2008, which led to the global financial crisis.
Evergrande, which announced it might not be able meet its financial obligations completely, defaulted on some of its bonds overseas.
According to reports, it has entered into a debt restructuring with Chinese authorities. This could include the sale or transfer of some founder’s personal assets.
Vinesh Motwani, Silk Road Research, stated that although it is not transparent, it is clear when we talk to our industry contacts in China.
Evergrande v Lehman
“The greatest difference between the two is Evergrande, which was a train wreck everyone saw coming,” stated Mr Motwani who was an analyst at Credit Suisse in the US when Lehman fell.
“Evergrande was clearly one of the worst offenders when the ‘three redlines’ policy was first announced over a year ago. China’s reaction was therefore ‘this was a long-coming’.”
The “three redlines” are a set debt thresholds that severely restrict the ability of some property developers to borrow. The sector has been experiencing uncontrolled borrowing for decades, something that the People’s Bank of China, PBOC, described as “reckless”.
According to Rory Green (Head of China and Asia Research at investment firm TS Lombard), Evergrande’s crisis can be described as a “grey rhino”, a term that describes a slow-moving, obvious threat rather than a surprise “black swan” occurrence.
He stated that Evergrande’s warnings have been around for a long time, so no bondholder should be surprised to hear they are defaulting.
What makes this crisis so unique?
The major difference between Lehman Brothers’ collapse and Evergrande’s crisis is the fact that the US government had to pass legislation to be able to intervene, while the Chinese government doesn’t have this problem.
Beijing controls the country’s real estate market through state-owned bank, so it knows which developers will default. This is something Washington couldn’t have done during the subprime mortgage crisis.
China is also being more selective than the US during the global financial crisis. China’s Communist Party, unlike Washington, is more fragmented than Washington.
“Beijing acts like a surgeon who is examining a tumor and is asking himself, “What do I need to save?” Alicia Garcia Herrero is the chief economist for Asia-Pacific at Natixis.
It is vital that Evergrande’s daily operations continue to be run smoothly for the Chinese government. The company must be able to finish the homes it builds so that normal property buyers don’t suffer and the trust in the property market doesn’t get seriously damaged.
Ms. Herrero said, “Beijing also has to look at the heart, if that is still beating.” This refers to people’s perceptions about the property sector.
According to Mr Motwani, this approach appears to have had a limited impact on the housing market. “Actual property values are still up year-on, They are still up year-on-year, even though they may have fallen month-on–month.
However, there are worries that potential buyers might delay purchasing new homes if the prices continue to drop. This would slow down the market.
What happens to Evergrande’s future?
Experts expect Evergrande’s restructuring to take months, or even years. There will be very few headline-grabbing announcements, as authorities attempt to avoid the same shocks that rocked the global financial system following the collapse of Lehman Brothers.
Mr Green cites past Chinese business failures. He uses the example of Anbang, an insurance and financial giant, to illustrate his belief that Evergrande’s restructuring will be a lengthy process. “Anbang entered restructuring two years ago and it continues today. Evergrande is much larger, so it could take many years. However, I believe that the worst funding situation has passed.”
Evergrande could be divided into distinct units, which is the most likely scenario. This will involve the destruction of the grey rhino, and regional banks will be charged with dealing with the separate units in order to maintain the stability of both the sector and the economy.
International investors will be afraid?
Although Evergrande’s missing offshore bond interest payments might not have caused a financial meltdown, they are mainly held by wealthy foreign investors. However, analysts are concerned about their impact on China’s property sector.
Jackson Chan, a financial market research platform Bondsupermart stated that “It certainly hurts the faith of foreign investors in China’s offshore real estate bonds.”
It has also made it more difficult for Chinese property developers and investors to borrow money internationally.
It remains to be seen how Beijing will balance its property market policies with the possibility of China’s huge real estate industry losing access for affordable foreign investment.
