Encouraged by remote work, many families saw the chance to move or renovate their homes during the Covid-19 pandemic. With that, the real estate and construction market soared across the globe, driving home prices and renovations in several of the world’s largest economies. Last week, however, the sector was threatened by the possibility of default by Chinese developer giant Evergrande.
The impact of the crisis on the Brazilian market is already significant, and the country should be one of the most affected if the company’s debts are not honored, according to experts consulted by the metropolises. This is because Brazil provides a relevant part used to build Chinese properties: iron ore.
Evergrande’s debt already exceeds R$300 billion. The amount made the financial market melt on Monday (20/9) in Brazil, Europe and Asia. The bad mood only passed when the company signaled negotiations for small installments with some creditors. Even so, the fear remains.
“There has already been a decrease of around 35% in the purchase of iron ore since then. This reduces domestic production, which impacts property prices. In other words, what was already high should go up even more”, explains Fábio Pizzamiglio, director of the international trade consultancy Efficienza.
According to official data, 34% of the country’s entire export volume is Chinese. Of this total, 17% corresponds to iron ore. In addition, China is the fourth largest investor in Brazil.
“If the Evergrande crisis continues and the Chinese government does not move, Brazil will suffer from a chain reaction, since our country is one of those in which they are least interested in investing”, says the director. In this scenario, companies can leave Brazil, which would increase unemployment and affect the circulation of trade.
On the other hand, the crisis could also bring a breath to the construction companies, according to a more optimistic view of the situation. “They have had a lot of problems with the shortage of material, which, consequently, results in weekly increases in the price of inputs”, assesses the vice president of the Real Estate Law Commission, Almiro Jr.
According to the lawyer, the shortage is due to the high demand and “it is more favorable to export than to supply the domestic market”. Despite the optimistic assessment, Almiro Jr. also believes that real estate prices will increase rather than decrease in the medium term.
China versus Evergrande
Economists hope the Chinese government’s protectionism will mean action as soon as possible, as the Asian country’s economy is much more closed than that of the United States when the US housing bubble burst in 2008, for example. The situation affected the whole world and was considered the worst economic crisis since the last depression (1930).
In the case of China, Evergrande’s indebtedness is partly the fault of the government itself, which has been at a crossroads with the real estate market for years. Easy access to loans contributed to artificially raising property prices and opened up space for speculation.
This culture that the government would always bail out companies on the brink of bankruptcy caused banks to lend money without much discretion. Now, the state is trying to convince that this will no longer happen, which leads to a big discussion about China’s interference in Evergrande.
According to BP Money, however, a deal is underway between Evergrande and the Chinese Communist Party that could result in the company’s restructuring into three separate government-controlled entities.
“The deal is designed to protect Chinese citizens who have bought Evergrande apartments, like the ones you see protesting in the streets, and also those who have invested in Evergrande’s wealth management products,” a source told Asia Markets.
Who is Evergrande in the bread line
The developer is an empire with 200,000 employees and around 1,300 projects in more than 280 cities. The company’s revenues correspond to 2% of the entire Chinese Gross Domestic Product.
Founded in 1996 by Hui Ka Yan, the company grew along with its debts, which made it the most indebted company in the world.
In addition to working in the real estate sector, the group also invests in the media and food sectors, and even has a football team, Guangzhou FC.