China Evergrande Group’s Liquidation Crisis Likely to Be Contained, Say Analysts
China Evergrande Group’s logo is displayed on a phone screen in this illustration photo taken on September 27, 2021.
Concerns about China’s Struggling Real Estate Sector
A liquidation order issued to property giant China Evergrande this week has deepened concerns about China’s struggling real estate sector. However, analysts suggest that the spillover effects are likely to be contained, with some even considering it “good news.”
Shehzad Qazi, Chief Operating Officer at China Beige Book International, has pointed out that China will be compelled to absorb the liabilities of any large company failures within the property sector to safeguard against wider contagion.
China’s Non-Commercial Financial System Forecasts Stability
Qazi underlines that China’s non-commercial financial system ensures that there will not be a “Lehman moment” as the government effectively controls all intermediaries. Hence, the government has the power to enforce continued lending, borrowing, and supply, averting a massive credit event.
Drawing parallels to the 2008 collapse of Lehman Brothers that resulted in a global recession, Qazi suggests that the success of fiscal stimulus measures in China could uplift sentiment and stimulate economic growth, which is anticipated to be slower this year compared to the previous year.
Qazi emphasizes that the effectiveness of fiscal stimulus measures and the stabilization of the property market are crucial. China should shift its focus towards fiscal measures since monetary stimulus has proven to be unsuccessful in the country.
Containing Fears of Contagion Despite Evergrande’s Downfall
Despite Evergrande’s likely downfall and the subsequent suspension of its shares, fears of contagion are relatively contained. The Hong Kong Stock Exchange suspended the company’s shares following a 20% plunge on Monday.
China’s Property Sector Facing Debt Crisis
China’s property sector, which serves as the bedrock of its economy, is grappling with a massive debt crisis. The balance sheets of major developers, shackled by extensive debt, have led to alarming defaults.
Among the country’s largest developers, Country Garden has struggled to repay its substantial debt. While the risk of defaulting on its yuan-denominated bonds loomed, the company managed to avoid a default for now. Their dollar-denominated debt, however, remains a default.
While China has experienced several defaults, mainly offshore, they have not resulted in onshore financial instability. Analysts believe that the defaults in China’s property market have not significantly spilled over into its domestic financial system.
The recognition of the Hong Kong court’s order for Evergrande’s liquidation in mainland China remains uncertain. Most of Evergrande’s assets are located in mainland China, and questions persist regarding the extent of Beijing’s recognition and the potential fallout.
Analysts at Commerzbank anticipate a relatively contained fallout, driven by Beijing’s more aggressive risk containment measures and potential political considerations, even if a mainland Chinese court acknowledges the Hong Kong court order.
