October 19, 2021

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E24 . Chinese Evergrande Problems Can Affect You Even Without a Chaotic Breakdown

E24 . Chinese Evergrande Problems Can Affect You Even Without a Chaotic Breakdown

The world’s most indebted real estate developer, Evergrande, is on the verge of collapse. Things that happen in China will not exist in China, says head of analysis Pål Ringholm.

Giant: Evergrande is headquartered in Shenzhen, southeast China.

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Market eyes on Asia. As inflation fears circulate in the West, China’s second-largest homebuilder is at risk of collapse.

Evergrande has debts of about 2,500 billion NOK and about 1.5 million homes are under construction.

Angry investors surrounded the company’s headquarters to demand answers about the future.

The market now fears that Evergrande’s problems could spread to the rest of China’s real estate sector, which is estimated to account for somewhere between 15 and 30 percent of the economy.

On Thursday, Hong Kong’s Hang Seng Index fell to its lowest level since November last year – and property stocks led the decline.

The concern is inflation in the West, and credit in the East, says Pål Ringholm, head of credit analysis at Sparebank 1 Markets, to E24.

– Ringholm says that the things that happen in China will not exist in China.

Credit brake could extend to Norway

Three years ago, Ringholm notes, Evergrande has been the world’s most valuable real estate company.

– Not today. Market prices one hundred percent in case of technical bankruptcy.

He says it is difficult to predict what President Xi Jinping will do.

– I think the Chinese authorities will try to avoid the Lehman moment and try to ensure debt restructuring. Ringholm says the Chinese will not let the biggest banks go bankrupt.

Pål Ringholm is Head of Credit Analysis at Sparebank 1 Markets.

Banks, investors and analysts Bloomberg also spoke of their expectation that restructuring is more likely than a chaotic meltdown.

But even if China avoids a major financial crisis, the development could have negative repercussions.

One question is whether or not we’ll have a Lyman moment. Another question is whether the real estate market is going as before or not. Even if we don’t get a moment with Lehman, it’s reasonable to assume that this will limit economic growth even in a “best-case scenario,” says Ringholm.

The ripple effects could also reach Norway and the Oslo Stock Exchange, according to the head of the analysis department.

The direct impact in the West is low, as a relatively moderate share of Evergrande’s debt is borrowed in dollars. But every time China hits the credit brakes, it spreads.

-Between 2013-2015, the commodity markets hit, and suddenly housing prices in Stavanger fell without seeing it coming. From 2017 to 2018, credit in China slowed again. Emerging stocks underperformed, and in the fall of 2018, the Oslo Stock Exchange followed suit, says Ringholm.

Chinese Scholar: – One Piece in a Big Puzzle

Chinese researcher Hans-Jürgen Jasmer at Nuby and the University of Bergen explains that Evergrande’s situation is due to a combination of three things.

– There is a large real estate developer who has invested and raised large debts. Since then, the Evergrande Gap has widened and expanded into different sectors. Then there were regulations from the Chinese authorities, which were tightened across the country, especially regarding the acceptability of high debt rates. So Evergrande must get rid of the debt, which has made waves in the entire company and eroded confidence among investors, Gåsemyr tells E24.

– It would be a devastating vortex, he summarizes.

Hans-Jürgen Jasmeyer is a senior researcher at Nupi and a postdoctoral fellow at the University of Bergen.

Gåsemyr also believes that the Chinese authorities will try to avoid a collapse.

– I believe that the authorities at the local and central levels will provide solutions that reduce impact and enhance confidence in parts of the investments that have been made. Evergrande is a huge player with big families and people behind him, but he’s also one piece in a big puzzle, he says.

It is too early to predict the end of visas, but there will be great interest in finding solutions.

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There is no automaticity in their intervention

Gåsemyr explains that the authorities in China are striking a balance between mitigating the adverse effects and clearly demonstrating that companies like Evergrande should take less risk.

– Xi Jinping has implemented very significant austerity measures across the board to make Chinese companies less vulnerable, says researcher.

– When it comes down to it, the influence of Xi Jinping and the Communist Party is potentially great and almost absolute. But there is no automaticity in their intervention.

– Evergrande has business all over China, so there will be many relevant local authorities at various levels, which are also related to Evergrande’s various companies. There are also many who press for their interests. Gosmeir concludes that there is no team in Beijing and sends orders directly to companies and banks.

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