The debt crisis at the Chinese real estate company is arousing concerns among investors about a “Lehman moment”. The collapse of the US investment bank Lehman Brothers a good decade ago sent shock waves through the financial markets around the world. Analysts doubt that it will come to that again this time, also because they hope for help from the state. The prices of stocks and bonds fell again on Tuesday. Confident tones from Evergrande Chairman of the Board of Directors Hui Ka Yuan did little to help.
“I firmly believe that Evergrande with your commitment and hard work will get out of its darkest moment and fully resume construction as soon as possible,” Hui wrote in a letter to the staff. Evergrande will meet its obligations to property owners, investors, partner companies and banks. But Hui did not say how this could be done.
Evergrande has piled up a mountain of debt worth more than $ 300 billion and has defaulted on its creditors. The ratings have been downgraded and the prices of Evergrande stocks and bonds have been falling for days. On Tuesday, the title collapsed again by up to seven percent. Papers from other real estate companies are also under pressure. The rating agency Global downgraded the creditworthiness of Sinic Holdings because of possible contagion effects from Evergrande, whereupon their shares plummeted by 87 percent.
Analysts of the warned of risks for the entire financial system in China, but do not foresee a “Chinese Lehman moment”.
According to experts, state aid is necessary to avoid the risk of contagion for other industries. “There must be behind-the-scenes negotiations to government recapitalize Evergrande,” said Andrew Collier, chief executive officer of Orient Capital Research. Should the group not be able to service part of the debt, this raises questions from all other creditors. “The government cannot want another crisis.” Since the difficulties began, the government has made little comment on the subject.
The experts at the rating agency S&P see it differently. The Beijing government will only step in if Evergrande’s problems spill over to other real estate developers and affect China’s entire economy. For analysts, however, a very possible scenario: Due to Evergrande, among other things, they lowered their forecast for growth in China’s gross domestic product (GDP) for this year to 8.0 percent from 8.3 percent.
The industrial nations organization, however, confirmed its growth forecast. GDP is expected to grow by 8.5 percent in 2021 and 5.8 percent in 2022. “We believe that the Chinese authorities have the fiscal and monetary capacities to cushion the shock,” said chief economist Laurence Boone.
Gucci handbags for investors
Investors are not only unsettled about the situation at Evergrande, but above all angry. “It is immoral of Evergrande not to pay back my hard-earned money,” grumbled an investor who last year invested 650,000 yuan (around $ 100,000) in Evergrande investment products at an interest rate of more than seven percent. He trusted the company after seeing an advertisement in the elevator in which Evergrande had presented itself as one of the world’s 500 wealthiest companies.
More than 80,000 people lent Evergrande money through such financial products. The company has not yet repaid around 40 billion yuan. Evergrande lured some investors with the prospect of 12 percent interest or gifts like Gucci handbags and Dyson air purifiers. The fixed-rate investment products were advertised in a flyer as being suitable for investors with a conservative risk profile.
The shock waves emanating from the struggle for survival of the Chinese real estate group Evergrande also hit the Dax.