Are we at the Brink of a Financial Pandemic? Is China having its Lehman Moment?
The bankruptcy of Evergrande, China’s real estate giant, with a debt of USD 300bn resulted in mass protests across the country. Evergrande is a Fortune 500 company that sells around 6,00,000 homes each year and. Evergrande is a reflection of China because both of their stories were supercharged with massive debt. The company needs a bailout, it is China’s Lehman moment.
This could be the beginning of a FINANCIAL PANDEMIC!
If the China bailout of Evergrande happens, the question then arises – how many companies will China bailout? And if it does not bailout, what would the investor bloodbath entail?
The Chinese Facade of Stellar Growth
It is no secret that China’s astonishing rise has been fuelled by massive borrowings, and its debt bubble is not unsustainably large.
China’s Corporates owe in the coming 12 months an unnerving $ 1.3 Trillion. In early 2020, over 2,00,000 companies declared bankruptcy.
In 2019–20 Chinese corporations defaulted on $20 billion.
The Chinese plan to combat this is with more debt, in 2020, Chinese companies extended nearly $ 3 trillion in loans. The question is how long can China keep the debt bubble from exploding.
Chinese Growth Facade
The only source of information that we have on Chinese growth is via the world bank and such institutions. It turns out that China is influencing or buying the officials at World Bank and IMF to give them a better ranking By fudging the numbers.
There is a lot of lobbying, arm twisting, and manipulation. In 2017 when the ease of doing business report was being prepared, in which China jumped seven ranks. It turns out to be a case of manipulation.
The World Bank recently published their ethics report, revealing that senior officials were acting on China’s behalf; they were Chinese stooges.
Kristalina Georgieva, the then CEO of World Bank and now the head of the IMF, was a prominent name mentioned in the report. The scandal has put the credibility of these institutions in jeopardy.
The Chinese Growth Fairytale – Is it for REAL?
When China opened its economy in the 1980s and 1990s, it created unprecedented growth. But to sustain growth, one needs reforms, and China under Xi Jinping is more controlling than ever. He wants complete domination; crackdown on big tech, online gaming, and financial giants.
Here is China’s growth data and projections:
The crackdown on the investors has driven away investors, and COVID-19 has, for now, damaged the Chinese image irreparably.
China manages to still get goodwill because it buys goodwill with money, but as the Chinese Checkbooks dry up, China will lose its advantage.
The Financial Pandemic
Property development has been significant in China’s economic growth, accounting for nearly 28% of the GDP. The growth primarily has been fuelled by debts with huge foreign investments and maybe about to blow up.
A slowdown in property construction, China’s economy, would cause a painful decline in GDP growth, commodity demand, and would result in disinflationary ripples across the world.
Over the years, foreign investors invested billions of dollars in bonds in the Chinese property sector. The yield was high, as high as 10%, and risk mitigated by the assurance that the Chinese will bailout when push comes to shove. They assumed this because of how crucial the funding of the property sector is to the Chinese economy.
The Push has Come to Shove: The Crackdown on Property
Lately, China’s crackdown on property speculation is guided by the official mantra that “housing is for living, not for speculation”.
The main question is CAN the fall of overleveraged property developers cause an economic crisis?
It may!
The Chinese government controls everything – the central bank, the big four state-owned commercial banks (the largest banks in the world), the bad-banks, and everything. It can order and control the crisis.
Deleveraging Property Sector
The changed stance of the government to stop speculation on the property, and deleverage it is an effort to rebalance the economy away from property development.
The government seems prepared for the dire consequences and refuses to bail out bondholders. This will trigger a large-scale bloodbath among investors, particularly foreign investors.
If more companies like Everglade go under, there will be a spillover to the rest of the world. We all remember the 2008 subprime crisis, all was good, until one day, it was not. As Macquarie analysts wrote in a Wednesday note.
“A correction in China’s property market would not only slow the domestic economy but have global consequences too.”
Can China manage its Lehman moment?
