Is China just experiencing a repeat of the US collapse from 2008 and will the whole world feel it?

Is China just experiencing a repeat of the US collapse from 2008 and will the whole world feel it?

Angry protesters have gathered in recent days in front of the headquarters of the real estate company Evergrande from Shenzhen, near Hong Kong, looking for an answer to the question of what its future will be.

About 1.5 million people have made deposits for new apartments which are yet to be built, but all the news suggests that it is China’s second-largest construction company is well on its way to collapse, which could be one of the country ‘s biggest economic failures.

The strong expansion of the Evergrande was made possible by the Chinese real estate boom and a long period of unprecedented economic growth. In the end, however, it turned out to be company over-indebted, that it has accumulated financial obligations of over 300 billion dollars.

Weaknesses were revealed last year, after authorities began tightening regulatory rules as they emerged difficulties in paying suppliers and covering other costs, and over time they only became more pronounced. In order to avoid uncontrolled bankruptcy, the management eventually hired advisors.

Systemic risk

The real estate business is considered one of the main drivers of Chinese growth, behind which stands about 30 percent of economic activity, so analysts have no doubt that the bankruptcy of such a large company as Evergrande would have huge consequences.

Investors are increasingly nervous that the problems could spread to other real estate companies and creatures systemic risks to China’s banking system, second in size to the world economy.

(AP Photo/Andy Wong)

In case the restructuring is not successful, it is quite certain, other construction companies in the country could suffer the consequences of difficult access to liquidity.

Currently, the most likely scenario, according to Reuters, is spontaneous sale of property and controlled bankruptcy proceedings that will protect small investors, but damage could be suffered by corporate bondholders.

The prospects for saving with public money are very poor. In a note for clients, Nomura analyst Iris Chen said yes he does not believe that the government has a motive to save a private company Evergrande, but will not even actively push it down, but will oversee the orderly bankruptcy.

Milijarder Ka Yan

Formerly known as Hengda, China Evergrande was started in 1997 by Hui Ka Yan, today one of the richest Chinese. Last year Forbes ranked him third among the rich Chinese, but he soon dropped to 10th.

The company sells apartments to high- and middle-income buyers and is present in more than 280 cities. The company has completed nearly 1,300 commercial, residential and infrastructure projects, and employs about 200,000 people.

Evergrande has expanded to other areas of the economy, including food, life insurance, TV and film… He also manages the football club FC Guangzhou (formerly Guangzhou Evergrande). In addition, Evergrande has stepped up its acquisitions in recent years, taking advantage of the real estate boom.

Many buyers on social media have expressed concern about whether their money will be refunded after the suspension of housing projects. Two credit rating agencies downgraded Evergrande last week, and shares of the listed company in Hong Kong have fallen more than 80 percent this year.

Source: Morning paper

Photo: Beta AP


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