Worries about Evergrande: Fear of a new real estate crisis

Beijing / Frankfurt (dpa) – Evergrande is the second largest real estate developer in China and has debts of the equivalent of more than 300 billion dollars (256 billion euros). Investors fear a default.

The troubled corporation has to raise money to pay banks, suppliers and bondholders on time. The company is so large that some experts fear a “risk of contagion” for the Chinese economy and beyond. The most important questions and answers:

How did this come about?

Corporations like Evergrande have grown in the past ten years ago because real estate prices in China have risen sharply and there has been a construction boom. However, it was a thorn in the side of Beijing that the industry’s indebtedness continued to grow. Now the government is enforcing strict rules. Beijing has shown the corporations “three red lines”. The ratio of liabilities to assets must not be more than 70 percent. In addition, the net indebtedness should not be more than 100 percent. The third “red line” concerns the ratio of liquid funds to short-term liabilities of the company, which must be greater than a factor of one.

Why is it hard for Evergrande of all people?

The group was particularly aggressive on the market. Land purchases were financed with loans, new apartments sold at low margins to drive sales up. Evergrande not only built houses, but bought 2010 a football club, invested in other industries from mineral water to baby milk to electric cars. His stand at the Shanghai International Auto Show in April was one of the largest, although the company hasn’t even really started building cars yet. In the first half of the year, the e-car division alone posted a loss of the equivalent of 630 million euros.

If the Chinese government becomes Help rush?

Investors are eagerly waiting to see how Beijing will position itself. In the past, when major economic failures threatened, the government usually rushed to help to prevent upheaval. In the case of Evergrande, however, the situation is different. After all, the Chinese leadership wants to use the new rules to ensure order. An example could therefore be made of Evergrande. The rating agency Standard & Poor’s warned in a statement on Monday that the government could not assume that the group would be bailed out. According to the agency, Beijing would only be forced to intervene “if there were widespread contagion that would result in the collapse of several large construction companies and pose systemic risks to the economy”.

How are the stock exchanges reacting?

Concerns about an expansion of the crisis are affecting sentiment on stock markets around the world. At the beginning of the week things went down significantly. The German benchmark index Dax fell to its lowest level since May. “The fear of the next real estate crisis is currently great,” is how market expert Christian Henke from trading house IG describes the situation. The Chinese government does not seem ready to help Evergrande. “The concern now is that more corporations from this sector will be torn into the depths and that a new real estate crisis may develop from this. Memories of the bankruptcy of the US bank Lehman Brothers in 2008 come back to life. »

What were the consequences of the Lehman bankruptcy?

At that time, the real estate bubble financed on credit in the USA had burst. Junk loans bundled by financial jugglers into obscure securities turned out to be largely worthless. Because of the global networking of the financial markets, the problem, initially limited to the USA, grew at the latest with the bankruptcy of the US investment bank Lehman Brothers on 15. September 2008 led to a global banking crisis. Financial houses had to cope with losses in the billions, trust in business partners eroded, and many institutions were saved from collapse with billions in taxes. The upheavals in the financial system plunged almost all economies 2009 into recession.

Is the situation of Evergrande comparable to Lehman?

If a colossus like Evergrande should go bankrupt, creditors would have to expect defaults. “The difficulty is always the systemic risk,” said China expert Horst Löchel from Deutsche Welle’s Frankfurt School of Finance and Management. “Banks can get into trouble as a result, and in the worst case scenario, this creates a negative pyramid scheme. If that happened, the upheavals would of course be enormous. ”

However, Mirko Wormuth from the German-Chinese fund Awesome Capital considers the comparison of Lehman and Evergrande to be“ not at all appropriate ”. Evergrande 90 percent of its business in China and is therefore “a nationally limited credit risk,” said Wormuth to the business magazine “Capital”. For most medium to large banks, loans were not a large part of the total. The Deutsche Bank fund subsidiary DWS points out that “the direct involvement of foreign bondholders in Evergrande seems to be relatively modest.”

What do experts expect for the Chinese banking sector?

Experts from Landesbank Helaba do not rule out a “Lehman effect” in China. According to DWS, however, even among the Chinese banks, “the commitment should be fairly broadly diversified, and the high level of debt is likely to have already led to high write-downs, which could perhaps limit further imbalances”. However, Chinese banks and financial institutions are also heavily involved in Evergrande’s suppliers, so domino effects cannot be ruled out, writes DWS.

Standard & Poor’s believes that the Chinese banking sector is a possible collapse of the real estate giant could digest without major turbulence. According to S&P calculations Chinese banks had around 400 billion yuan (52, 6 billion euros) with the company at the end of June Fire. “A collapse of Evergrande as such would not destabilize the banking system,” the agency said. If, however, other, highly indebted, large real estate developers should subsequently get into turbulence, this could result in a “challenging situation”.

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