Evergrande is held hostage to Beijing property pain threshold
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When asset bubbles burst, they usually follow a familiar script. Speculators go too far and prices get sky-high before financial gravity is restored with a “pop”. Only then will governments consider stepping in to protect the public interest or save a company that is too big to fail.
But the worsening crisis surrounding Chinese firm Evergrande, the world’s most indebted real estate company, follows a different story.
It is Beijing’s restrictions on the real estate sector that are at the origin of Evergrande’s tour de force. The anxiety felt by the company, its creditors and stock market investors will not subside until Beijing decides that a certain pain threshold has been reached.
” Investors. . . rightly ask where Beijing’s pain threshold is, in terms of slowing economic growth that would prompt authorities to turn the tide and ease controls on the real estate sector, ”said Logan Wright, Hong-based director Kong at Rhodium Group, a consulting firm.
“This political turning point is still far away,” he added. “Beijing is more likely to wait for signs of financial stress to materialize, than to act preemptively.”
Evergrande, which has more than $ 300 billion in obligations to creditors and 778 projects underway in 223 cities, is taking hits. Its Hong Kong-listed shares fell 18.9% on Monday to their lowest level in about a decade. Fitch, the rating agency, downgraded the credit rating on the company’s bonds and warned that any default “seems likely.”
But big questions loom. Will the company be able to honor $ 129 million in interest payments owed on its bonds this month or the $ 850 million owed for the rest of the year? Should such payments to bondholders be given priority over payments owed on “wealth management products” held by tens of thousands of often low-income Chinese speculators?
Of course, Beijing – which has ultimate influence over an almost entirely state-owned banking sector – can issue an order at any time to bail out Evergrande.
But most analysts believe Beijing intends to turn the screw. He decided to make an example of Evergrande in order to make other real estate developers understand that he takes seriously the “three red lines” set last year to reduce debt levels in the sector and curb chronic oversupply. residential space.
Nonetheless, it is equally clear that Beijing cannot afford to go too far. With a real estate sector contributing 29% of gross domestic product, any annihilation of Evergrande would hurt the entire sector and delay a post-pandemic recovery in economic growth.
Thus, Beijing has embarked on a very delicate exercise. He must inflict enough pain to show he is serious, but not to the point of making one of the most important engines of economic growth dying.