Singapore And Hong Kong Are Not Immune To China Evergrande’s Risks
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Singapore And Hong Kong Are Not Immune To China Evergrande’s Risks

10th December 2021 | 5 min read

With the new Omicron strain of the COVID-19 virus spreading around the world, the debate is how severe the contagion will be. A similar question can be asked of China Evergrande Group: How will the world’s most indebted property developer, which is close to bankruptcy, infect the world economy? 

China Evergrande likely defaulted, as it missed paying interest on some US dollar offshore bonds on December 6, according to several media reports. 

If the Hong Kong-listed firm goes bankrupt, the crash will be severe, if the situation is not well managed. Evergrande is USD 300 billion in debt. Among Chinese developers, it is the biggest issuer of offshore bonds with about USD 20 billion outstanding. 

“There is little doubt that foreign investors will be likely hurt, because Beijing is not interested in helping investors who knew the risks when they were buying the bonds in the first place”, Andrew Collier, managing director of Orient Capital Research, a Hong Kong economic research firm, told Bread News. 

“But the Chinese government wants to keep the economy from collapsing. They are trying to let the provincial governments micromanage the situation. Micromanaging by local governments is a clever pass-the-buck solution”, Collier said. 

On December 3, Evergrande admitted it was close to bankruptcy, as it might not have enough funds to meet financial obligations. The company disclosed it has received a demand to perform its obligations as a guarantor of USD 260 million of debt. If it is unable to perform its guarantee obligations or other financial obligations, creditors might demand acceleration of repayment, Evergrande warned. 

Evergrande said it plans to “actively engage with offshore creditors to formulate a viable restructuring plan of the company’s offshore indebtedness”. 

On December 3, the provincial government of Guangdong announced it sent a working group to Evergrande to oversee the risk mitigation, strengthening of internal controls and maintenance of normal operations at the company. 

On December 6, Evergrande announced a risk management committee was set up in the company, where the committee chairman is the company’s chairman Hui Ka Yan and the committee co-chairman is Liu Zhihong, deputy general manager of Guangdong Holdings, a company owned by the Guangdong government. This announcement noted that Hui ceded substantial control of Evergrande to the Guangdong government. 

Collier wrote in a report by Global Source Partners, a US macroeconomic research firm, on October 6, “Beijing plans to force the local governments to resolve debt issues locally. This passes the responsibility from the center to the periphery”.

Image credit: twk tt on Unsplash

“Evergrande’s debt, property holdings, and mortgage holders don’t have to coalesce into a national bloc that creates a systemic crisis. Instead, if each portion of assets is handled by provincial and city governments, along with local debt holders, then the sudden deflation that characterises a ‘Minsky Moment’ is less likely to happen. A collapse in asset prices in a specific location can be contained – at least that is what the PBOC and the Politburo are hoping”, Collier explained. 

A “Minsky Moment” refers to a sudden, major collapse of asset values caused by speculation, such as the collapse of Lehman Brothers which led to the global financial crisis in 2008. 

“There is no doubt that the collapse of the Chinese property market will have knock-on effects on the global economy. The question is whether that will happen. The Chinese government is trying to manage the situation”, Collier told Bread News. 

“It’s still an open question how well the local government will handle this”, Collier qualified. 

Beijing downplays Evergrande’s risks 

Chinese regulators played down the contagion risks of Evergrande, by issuing statements on December 3, the same day Evergrande admitted it was close to bankruptcy. This indicates the Chinese government is working closely with Evergrande on its problems. 

The People’s Bank of China (PBOC) said on December 3 that Evergrande’s woes will not affect the offshore US dollar bond market in the medium to long term. Thus, the central bank implied Evergrande’s downfall may possibly hurt the US offshore bond market in the short term.

Also on December 3, the China Banking and Insurance Regulatory Commission (CBIRC) said the debt troubles of Evergrande was an individual case. Finance-related debt accounted for one-third of Evergrande’s total debt, the holdings are dispersed and the financial investment is very small, said the CBIRC. As such, Evergrande’s problems will not have a negative effect on China’s banking and insurance sectors, the regulator added. 

The China Securities Regulatory Commission (CSRC) also said on December 3 that Evergrande represented an individual case and the overall development of China’s property sector was healthy. Currently, China’s A-shares stock markets are generally stable, resilient and highly active, said the CSRC. The default rate of the bonds listed on mainland Chinese exchanges remain at a low level of about 1 percent, the securities watchdog added. “The contagion effects of Evergrande’s risks on the capital markets are manageable”.

US regulators fear Evergrande’s risks

US regulators do not share the Chinese regulators’ optimism. 

In an interview with CBS News on November 14, US Treasury Secretary Jane Yellen said Evergrande’s debt problems could have repercussions for the global economy. 

“Real estate is an important sector of the Chinese economy. It accounts for about 30 percent of demand. And a slowdown in China, of course, would have global consequences”, Yellen explained. 

The US Federal Reserve’s financial stability report, which was released on November 8, warned that Evergrande’s debt problems might affect global economic growth and the US. 

“In China, …. the ongoing regulatory focus on leveraged institutions has the potential to stress some highly indebted corporations, especially in the real estate sector, as exemplified by the recent concerns around China Evergrande Group. Stresses could, in turn, propagate to the Chinese financial system through spillovers to financial firms, a sudden correction of real estate prices, or a reduction in investor risk appetite. Given the size of China’s economy and financial system as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States”, said the report. 

So are the Chinese regulators or US regulators right?

“Both are correct. The spillover from Evergrande will be manageable, but will have knock-on effects on the GDP of China and the world”, Michael Hammond, a partner of Shard Capital, a UK financial services firm, told Bread News. 

Many construction companies and other suppliers to the Chinese property sector will suffer, while world commodity demand will be affected by less Chinese demand for steel, copper and other building raw material, Hammond predicted. 

“Confidence in China by Western institutions will be hurt. 2022 will be a challenging year”, Hammond said. 

Given Singapore and Hong Kong have deep economic ties with the US and China, if the troubles of China’s real estate sector spreads to the US, both Asian cities will suffer a double whammy. 

Written by Han Shih Toh
Toh Han Shih is currently chief analyst of Headland Intelligence, a risk consulting firm in Hong Kong. He has been a journalist writing about business, politics and economics related to greater China for over 15 years, including at the South China Morning Post, MLEX and Finance Asia. During the late 1990s, he was a reporter in Singapore with the Business Times, reporting on technology, e-commerce, Internet and the dotcom bubble.
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