It was actually supposed to be a festive day with cocktails, a buffet and a stock market bell: just in time for the start of the enlarged German leader Dax index with 40 stocks, stock executives wanted to spread media optimism about the Trading Room. But because of Corona, organizers not only had to cancel the reception, the Dax also crashed into the depths, with a loss of almost three percent having accumulated by noon. Investor worries: Could a bankruptcy of Chinese real estate giant Evergrande also affect Western financial markets? The SZ answers the most pressing questions.
What is behind the real estate company Evergrande?
Evergrande not only has a big name, the real estate company actually is. This company is the second largest real estate developer in the People’s Republic, and at the end of last year Evergrande was working on nearly 800 real estate projects across the country. The principle: the interested parties pay in advance, then the real estate company builds. Behind the company’s empire is billionaire Xu Jiayin, who goes by the name of Hui Ka Ya. After his career in a state-owned steel plant, he founded the company in 1996 and not only enjoys excellent relations with the Communist Party, but also the construction boom in China. In 2017, he was named the richest man in Asia by Forbes business magazine. Now, however, the company is sitting on roughly $ 300 billion in debt.
Why is Evergrande having such big problems now?
The Chinese supervisory authority has issued a number of new rules in recent months to cool the housing market in the People’s Republic. Propaganda calls the “three red lines” the new financial requirements for construction companies. First, the liability / asset ratio must be less than 70%. Second, the net debt ratio should not be more than 100%. Finally, third, a ratio of cash to short-term liabilities is required which must be greater than a factor of one.
What sounds like dry financial arithmetic is a disaster for Evergrande: In April, the company tore up all three specs. The company is therefore no longer authorized to contract new loans. Since then, it has been difficult to repay the bonds, but above all to continue to build them. In particular, it could kill hundreds of thousands of Chinese with their money. Because: because the government had already made it difficult for construction companies to access bank loans in recent years, many companies have launched gray market funds or built them on prepayment. If Evergrande collapses, investors face huge losses.
Can’t Evergrande just sell his own property and use it to pay off his debts?
In theory, it would be possible. According to a statement, the group even wants to sell its own office building in Hong Kong in order to raise funds. In addition, Evergrande is trying to separate from its e-car division. The problem: So far, the group has not yet succeeded in either approach. But at least one of the company’s paint suppliers announced in early September that Evergrande had repaid part of its obligations in the form of real estate. Over the weekend, the company also offered its private investors to cash them in real estate.
Beijing management will save the company?
One thing is certain: without Beijing’s legal tightening, Evergrande would not be on the brink. We can therefore assume that the device has taken into account that real estate developers are in existential danger. So it is very unlikely that there will be a full-scale rescue plan, that is, a rescue operation. A crash of Evergrande, however, is possible. Regional governments and agencies could then manage and complete individual residential complexes to prevent Chinese owners from having to write off their assets.
Real estate and debt – many think of the financial crisis of 2007/2008. Could Evergrande have a ripple effect in the financial system?
The Chinese financial system is very isolated from the rest of the world. A bank failure like that of the Lehman Brothers investment bank in the fall of 2008 is almost impossible. However, it could be difficult for Beijing officials to contain the psychological consequences of the Evergrande disaster and prevent panic sales of real estate. Due to strict controls on capital exports and stock market gambling, many Chinese have invested their fortunes in apartments. For years, prices cannot be explained by mathematics. Tiny two-bedroom apartments in Shanghai are on offer for eight million yuan. The expected rent: 7,000 to 8,000 yuan per month. Statistically, it would take a thousand months to pay off the apartment – 83 years. And this even though no one in China is officially allowed to own an apartment. Because the building land belongs to the state, after all, China is a socialist country. Since the opening policy nearly 40 years ago, real estate has only been leased for 70 years. An investment that you own for 70 years but pay for 83 years – this can only be explained with the strict belief that the Communist Party will protect the real estate market.
Why did the Western exchanges seem so excited?
Experts don’t currently consider a global financial crisis to be impossible, but neither is it likely. But even without a domino effect in the financial system, the Evergrande affair could hit the stock markets: if the real estate bubble in China bursts in the wake of the turmoil, it could have serious consequences for the entire economy – steel companies to crafts. Because individuals have invested large sums of money in real estate, many Chinese people could do without other expensive purchases in the future, such as a new car. German manufacturers in particular, for whom China is by far the most important market, would notice this in their balance sheets.