Hong Kong property and real estate stocks took a beating Monday as Chinese real-estate giant China Evergrande Group is facing a debt crisis that is fueling fears of a collapse and potential contagion that could threaten China's economy.
The Chinese property developer has amassed $300 billion in debt and has been drawing comparisons to the infamous Lehman Brothers collapse of 2008. While the debt crisis has been intensifying as of late, it's also been on the Chinese government’s radar for some time now as debt levels throughout China, particularly in its property sector, had been raising concerns.
Evergrande said pretty bluntly earlier this month that “there is no guarantee” it could meet financial obligations. The company has been offloading properties and trying to attract new investors as it tries to avoid catastrophe.
So What is Going on With Evergrande?
Evergrande is supposed to make interest payments on several tranches of borrowing this week and it seems more likely than not that the company won't make those payments, which would count as a default. The earliest of such dates is this coming Sept. 23, though a substantial amount more is due later this year as well so the crisis could get dragged out for some time.
Evergrande is supposed to make $83.5 million in payments on Thursday on a 5-year, 8.25% dollar-denominated bond, as well as $36 million to holders on an onshore RMB-denominated bond the same day. Evergrande has a total of $669 million in coupon payments due through the end of this year, with $615 million of that coming from dollar bonds.
This past Saturday, Evergrande announced on its WeChat account that it is offering stakes in heavily discounted properties to wealth management clients in lieu of cash. Evergrande’s wealth division is giving investors the option to invest in residential housing at a 28% discount, offices at a 46% discount, and stores and parking units at a 52% discount. If these investors want cash, the company is offering to pay them 10% of the principal and interest every quarter, which would stretch payments out over the next 2.5 years.
Evergrande also generously allowed its employees the option to either lend the company money or lose their bonus.
So is Evergrande Another Lehman Brothers?
Not quite.
While the crisis is quite bad at Evergrande, and Chinese growth has been weaker than expected recently anyway, Wall Street is betting that there won’t be much threat for widespread contagion. Or, at least not to the degree as came in the wake of the Lehman Brothers collapse.
While the potential is there for Evergrande to become another Lehman with "spillover effects on China’s property sector, with economic implications" according to Barclays, it is unlikely to spread like wildfire through the global economy.
The first reason an Evergrande collapse likely wouldn't have the same ramifications as Lehman is simply because Lehman had about twice as much debt as Evergrande.
Another reason is that it probably just isn't in China's best interest to be hands-off at this point in time. China has been clamping down on the debt levels of its companies for some time and has been targeting companies that go against the government’s vision without hesitation.
But while the government has been ruthlessly and suddenly changing the rules of the game in an alleged effort to crack down on income inequality in the country, China remains very much incentivized to protect its economy.
So while Evergrande and its compatriots are very much in the Chinese government’s crosshairs, China is unlikely to let the company fail in a way that has widespread effects on the broader economy.
