This is why Evergrande crisis is fizzling

The prospect of a major bankruptcy in the Chinese real estate sector caused stock market turmoil this week. However, the currency world is sending a clear signal that the government has everything under control in China.

It's easier to prepare for a market shock if you know which direction it's coming from. In the past that was easy. In recent decades, almost every major crisis has blown over from the United States. Good examples are the stock market crisis of October 1987, the Internet crisis of 2000 and of course the financial crisis of 2008. The Asia crisis of 1997 caused a lot of damage, especially in the region itself. In recent years, however, the crisis wind has been blowing from a different direction. For example, the coronavirus spread from China to the rest of the world. In the spring, the container ship Ever Given from China caused unrest due to the blockade of the important Suez Canal. And this week, all eyes are on shaky real estate giant Evergrande.

Thunder in a clear sky?
The problems in the Chinese real estate sector do not come like a bolt from the blue. Due to increasing prosperity, more and more Chinese have enough money to buy a house or apartment themselves. Real estate developers are responding to this by starting huge projects in large cities. Investment bank Goldman Sachs calculated more than a year ago that the total value of the Chinese housing market had risen to USD 52.000 billion as a result of rising prices and a growing supply. By comparison, that's twice the value of the US housing market. However, the enormous growth also created all kinds of bubbles in the real estate sector, which the Chinese government tried to tackle. The problems at Evergrande indicate that this didn't quite work out.

Domino effect
Evergrande was founded in 1996 as a real estate developer. The strong growth of the housing market allowed the company to expand rapidly. The company is now involved in 1.300 real estate projects in 280 cities and its activities have expanded to asset management, food and the manufacture of electric cars. The company has borrowed approximately 300 billion euros to finance this growth. In recent days, however, it has become clear that Evergrande has insufficient capital to pay the interest on some loans. If lenders have to write off their money, these parties can also get into trouble. In this context, some articles have already made a comparison with the domino effect that arose in 2008 after the bankruptcy of Lehman Brothers.

The big difference
It will not come to that, because the Chinese economy is structured differently than the American one. Because banks no longer dared to lend each other money, liquidity in the financial world dried up completely during the credit crisis. In China – where most banks are state-owned – this is not a problem. Moreover, Evergrande has almost exclusively taken out loans in Renminbi. This makes it relatively easy for China to settle a possible bankruptcy domestically. Last week I wrote that the economic fires that the country has yet to put out have little impact on the currency world. Viewed in this way, it is therefore not so surprising that the renminbi - despite the Evergrande turmoil of recent days - is almost exactly at the same level as a week ago.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.