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Evergrande’s flaws in China: what happens next?

As real estate companies Evergrande and Kaisa default on more than $ 1 billion in bond repayments after weeks of uncertainty, here’s an explanation of what the debt crisis in the Chinese real estate market could mean for it. economy of the country:

– What happened to Evergrande? –

The Chinese government sparked a crisis in the real estate sector last year when it launched a campaign to reduce the excessive debt of real estate companies as well as runaway consumer speculation.

Evergrande, a real estate giant with operations in more than 280 Chinese cities, has been the biggest developer to pay the price for the crackdown.

Over $ 300 billion in debt, it teetered for months on the brink of default, every time coming back from the brink with last-minute repayment.

On Thursday, Fitch confirmed that the company first defaulted on more than $ 1.2 billion in bond debt, as it lowered the company’s status to a narrow default rating.

– China’s “Lehman moment”? –

A slowdown in China’s real estate sector, which accounts for a significant portion of the country’s economic output, could have spillover effects on global growth.

Evergrande’s woes have rocked stock markets – and the real estate industry accounts for a large chunk of the struggling dollar-denominated debt internationally.

But a default was long overdue, and fears about a “Lehman moment” – a reference to the Wall Street titan whose collapse caused panic around the world in the 2008 global financial crisis – did not materialize. materialized.

That’s because Chinese authorities have seemed unlikely to allow the type of overnight collapse seen in 2008, with analysts instead suggesting that Beijing will oversee a “controlled demolition” of the company.

“Is the financial system here, or elsewhere, as vulnerable as it turned out in Lehman’s wake? The answer is no,” the head of the Hong Kong Securities and Futures Commission told Bloomberg TV, Ashley Alder.

– What’s going on now? –

Evergrande had previously warned that he might not be able to meet his financial obligations, meaning the market had braced for the news.

The company’s admission prompted the local government in Guangdong – where it is headquartered – to summon billionaire President Xu Jiayin and announce that he would send a “task force” to the company.

Analysts said the moment marked the official start of the giant’s debt restructuring.

“I think the market has already taken into account the price default of Evergrande and many others,” Chuanyi Zhou, credit analyst at Lucror Analytics, told AFP.

And Thursday’s default is likely to speed up that process, they said.

But with the simultaneous default of real estate company Kaisa, China’s 27th largest real estate company in terms of sales, it may be too late to avoid some sort of ripple effect.

– What does this mean for investors? –

After already blaming the company’s woes on “mismanagement and indiscriminate expansion,” following the news of Evergrande’s default, the Chinese central bank chief hinted that he would be treated as a ‘in a “market oriented” way.

Despite the state’s reluctance to bail out Evergrande, its measures to contain the crisis have allayed investor fears of a disorderly collapse.

“It’s pretty clear that the state is seriously involved in handling the situation,” Shehzad Qazi, managing director of data analytics firm China Beige Book, told AFP.

“The priority would surely be to make sure that the homes are delivered, and what is left afterwards will be repaid according to the priority level of the obligations,” said Meng Ting, senior credit strategist at ANZ Bank.

– What about the other Chinese developers? –

At least 11 real estate companies have defaulted on their bonds since concerns began to grow over Evergrande in June.

Chinese real estate company Kaisa – which suspended stock trading in Hong Kong on Wednesday – was one of the latest to compound problems for a company estimated to have $ 11.6 billion in banknotes in circulation.

And real estate companies accounted for 36% of the $ 10.2 billion in offshore bonds that Chinese borrowers have defaulted on this year, Bloomberg said.

– How will the Chinese economy be impacted? –

The Evergrande crisis has drawn parallels with government intervention in other indebted companies, notably the aeronautical conglomerate HNA Group.

The restructuring of HNA hasn’t caused investor panic – although Evergrande’s higher profile means that this time around it will likely be a bigger challenge.

But whatever happens in Evergrande, Beijing’s broader crackdown has already had a major impact on the real estate industry and deepened concerns about the financial health of major businesses, driving down home sales and prices.

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