China Real Estate/Financial Crisis
Tomorrow (23rd), China's second real estate company, Evergrande Group, will have to pay $83.5 million dollars of interest on five-year dollar bonds with an interest rate of 8.25%. In addition, coupons of 232 million yuan (about $36 million dollars) of RMB bonds are about to expire. If Hungda fails to pay interest, it is regarded as default.
It is known that Hengda currently owes about $300 billion dept, including corporate bonds and loans from financial institutions.
Some are concerned that Hengda's bankruptcy will lead to a financial crisis like the 2008 Lehman crisis.
But it doesn't seem very likely. This can be explained by three reasons.
First, it is true that the 2008 US financial crisis, that is, the Lehman crisis, was caused by the bursting of the US real estate bubble, but the reality of the Lehman crisis was not simply caused by the real estate bubble. This is because US banks created various derivatives with mortgage bonds, which resulted in loans that were much larger than mortgage debt, and the bursting of the real estate bubble led to a series of insolvency of financial institutions.
In the case of China, a real estate bubble has also been created and will burst, but it is difficult to say that derivatives using mortgage bonds were created like in the United States. In other words, lenders are more likely to end up with mortgage bond-level losses.
Second, if Hengda goes bankrupt, it is most likely political rather than economic.
The cause of this crisis is the “political judgment” of Chinese President Xi Jinping, who put out strong regulations on the real estate market with the “co-wealth theory” at the fore.
In other words, it is a crisis caused by raising loan interest rates and regulating loans for political purposes. He introduced an upper limit on the proportion of real estate loans by banks. The background is that real estate speculation is overheated and the vacancy rate is over 10%, so there are too many vacant houses, but there are many people who are relatively dissatisfied because they do not have houses.
The Chinese government blatantly says it will satisfy people's desire to own a home by regulating real estate companies to bring down housing prices. China's National Institute of Finance and Development warns that there will be a sharp drop in house prices, and emphasizes that "if house prices start to fall below mortgage rates, you will not be able to repay the loan even if you sell the house." In addition, he argues that the real estate crisis must be endured and the false demands must be reduced.
However, if there is a possibility that Hengda's bankruptcy will lead to a Chinese financial crisis, it is unlikely that the Chinese government will ignore it. This is because Xi Jinping faces a life-long rule and has to host the Winter Olympics next year. Moreover, he is unlikely to hurt his foot by himself in the US-China conflict.
The reason the Chinese government tolerates Hengda's bankruptcy is probably because it was calculated that even if Hengda went bankrupt, it would not have a significant impact on the Chinese economy.
Third, because of the size of the Chinese economy.
Hengda's debt of $300 billion dollars is a huge amount, more than half of Korea's annual budget, but considering the size of China's economy, it's not huge. According to Bloomberg, Chinese banks' loans to the real estate sector amount to 50 trillion yuan ($7.5 trillion dollors). Of this, household mortgage loans amounted to 35.7 trillion yuan and developer loans 12.4 trillion yuan.
Financial institutions or individuals with bonds bitten by Hengda will suffer losses, but in terms of the overall economic scale, it is difficult to bring about a major shock.
In addition, the current debt ratio of the Chinese government is 66.8% of GDP, which is sufficient to nationalize insolvent companies. China's household debt has risen sharply in recent years, but the debt-to-equity ratio is still not high at 61.7% of GDP.
So what's the problem?
The problem is anxiety psycholoic situation.
This is because, following China's Big Tech regulations, the cooling of the Chinese real estate market may have a negative impact on the already unstable Chinese economy. It is in the same vein that the Hengda bankruptcy crisis has become global news. In other words, if the Hengda bankruptcy triggers a crisis in the entire real estate market in China, and then ignites into a crisis in the Chinese economy, considering the size of the Chinese economy, it is because of the anxiety that it could spread to a global recession.
In fact, on the 21st, Japan's Nikkei 225 Index closed at 29,839.71, down 2.17% (660.34 points) from the previous trading day. 3,000 lines are broken.
On the 20th, the Hong Kong Hang Seng Index fell more than 3% on concerns that the Hengda Group might not be able to pay interest on its bonds due on the 23rd.
The global stock market was shaken by concerns that the liquidity crisis in Hengda could spread to a global crisis.
On the morning of the 23rd, the US Federal Reserve announces the results of the September Federal Open Market Committee (FOMC) regular meeting. The market's touch is on the likely tapering and interest rate hike announcement by the US government today. Markets will freeze if the FOMC mentions tapering and rate hikes, and delaying the tapering announcement could dampen Hengda's shock.
Some speculate that the specific timing for tapering will not be mentioned until the end of the year. He said the US government would make efforts to reduce anxiety about the Hengda bankruptcy.
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