The Evergrande crisis continues to shake up stock markets around the world.
After yesterday’s panic, markets are now pondering what to do.
Evergrande crisis, hopes and illusions
China’s biggest real estate giant has accumulated debts of 2 trillion yuan, equivalent to 262 billion euros and 309 million dollars. On Thursday it will have to pay the equivalent of 80 million euros in bonds to its investors. It probably won’t make it and this could be the coup de grace.
The company has thousands of projects underway in 280 cities, employs 200,000 people, and has a supply chain that accounts for almost another 4 million jobs. Its collapse would also open up an unprecedented employment crisis. In addition, many investors are claiming their savings. Even suppliers have often been paid in shares and bonds that are now becoming waste paper. Not to mention the thousands of buyers of properties that were never delivered because they were not finished. The liquidity crisis is to blame.
The company is making a last-ditch attempt to make amends, hiring consulting firms that should provide it with the best strategy to get out of what has been called by its top management “the darkest hour”. It will probably start by selling off some of its branches that have nothing to do with real estate.
The United States and Europe are watching
In the meantime, Europe and the United States are observing: can the Chinese government really let its real estate jewel go bankrupt? The answer is yes, it could. President Xi Jinping said in 2018 that houses are for living in, not for speculation.
There is a real risk that the Beijing government will do nothing for Evergrande and remain equally idle for all the other big companies on the brink of bankruptcy. Moreover, it is not in the Chinese government’s DNA for the public sector to come to the rescue of the private sector. The markets are reckoning with this speculation, as there is no official comment from the government at the moment.
After yesterday’s panic, Asian exchanges continued to slide today, although not with the same intensity. Tokyo lost over 1%. The European markets, on the other hand, have fared better and can now speak of a rebound.
Speaking of stock markets, those who are currently trembling are the hedge funds that have Evergrande shares in their portfolios. Their value has now been reduced to a minimum: -80% YTD. Chinese credit institutions are also likely to feel the consequences of this crash, for the same reasons as the hedge funds.
The Fed leaves the markets in suspense
Evergrande has been compared to the Lehman Brothers bank. While waiting to see if the fate will be the same, the US markets are also turning their eyes inward.
Having been assured that Congress will pass legislation to avoid shutdowns and defaults, they are waiting for the Fed’s next moves. In fact, the US central bank could soon announce the start of tapering, i.e. the reduction in economic stimuli that have supported the US economy since the Covid crisis broke out. All this comes in a context of uncertainty: fears linked to the Coronavirus are still weighing heavily, as well as the collapse of the Chinese property market.
The other doubt is who will make these decisions: the Democrats are asking Joe Biden for a change of pace at the Fed. Jerome Powell could soon be sidelined. This is also a cause for alarm among investors. Nothing compared to Evergrande, which on Thursday will determine whether or not they’re the Lehman Brothers Made in China.