Evergrande — the Chinese real estate giant that shook markets last week — is in free fall. The company, which accumulates debt in the order of $309 billion (R$1.6 trillion), has seen its share value melt by nearly 90% since the beginning of the year.
On the surface, the case was reminiscent of the great crisis of 2008-2009. The collapse of Lehman Brothers, a bank that securitized and traded real estate derivatives, was accompanied by one of the biggest recessions seen in recent times, with impacts that spilled over to the entire financial system and the real economy, resulting in persistent high unemployment several years later. of the crisis. For many, the actions of the US government at the time were flawed. Some companies would, so to speak, too big to fail (too big to fail).
There is nothing to indicate that this is the case for Evergrande, which, unlike Lehman, is directly involved in real estate construction and development and has little connection with the banking sector. A large part of your debt is payments to suppliers and obligations to customers. The financial sector’s exposure to Evergrande is small, and the company’s collapse barely increases the bank’s stock of non-performing loans.
It is not new that the Chinese government shows little tolerance for speculation in the real estate market. The heating of the sector was already being fought through price controls, rigidity in financing and limits on purchased quantities. Last year, the government instituted a set of rules that restrict the financing of companies in the sector, the three red lines, hitting the hugely leveraged Evergrande. What was seen last week was nothing more than an immediate reflection of the rules that the government itself created to cool down the sector.
It would be surprising that at this point in the championship there was a government bailout of Evergrande, given Beijing’s goals for the sector. But there are other reasons to expect some concern.
About 2 million people have not yet received the properties they have purchased, and the tailored solutions must involve some order of priority among creditors, or even the participation of other construction companies in the completion of unfinished projects.
The Chinese government did not give further details on how it will act, but the real estate sector is in check: either as a co-participant in losses or via increased funding costs. An eventual default on Evergrande’s securitized debt represents an increase in financing costs for the industry as a whole, which remains subject to the same three red lines that left Evergrande with no way out in its debt rollover.
The episode signals difficult times for the Chinese real estate sector, which accounts for around 30% of the country’s GDP. In response to government guidelines, the sector finally cooled down: in August the drop in sales was 15% (relative to the same month of the previous year). The impacts are varied and feed into considerations about inequality: while wealthier cities feel little effect from the housing downturn, less developed cities experience a fall that is up to three times greater. As part of the wealth of the Chinese is in real estate, the slowdown in the sector and falling prices directly impact the value of household assets.
It is possible that the collapse of Evergrande is not just an isolated event, and the winds could be one of changes regarding Beijing regrass rules for the sector. A very rapid deterioration in the real estate sector is accompanied by social risks that the Chinese government will need to address.
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