Evergrande’s Impact on the Financial Market

Recent news regarding Evergrande have seen shadows of the Global Financial Crisis emerge with headlines like ‘Is this China’s Lehman Brothers moment?

Endorphin’s view on Evergrande’s possible collapse is that the Chinese Government will (eventually) get involved. This is due to the sheer size of the property market and importance to its domestic economy, and social impacts of a housing market collapse. This may involve:

  • More liquidity injections into the financial sector and a Reserve Requirement Ratio cut later this month, providing more liquidity in the banking sector.
  • Asset sales – with stronger balance sheet developers buying land and construction sites at bargain prices from the weaker balance sheets like Evergrande. SOEs will buy some assets and China may revive Asset Management Companies to house assets.
  • Low quality balance sheets will be unwound by the state or allowed to default. Equity holders will be taken to the woodshed, and creditors will receive cents in the dollar.
  • Housing and construction activity will remain soft for some time.
  • Households will be supported. A key risk through all of this is the wealth management products issued by banks and companies to fund expansion. We expect China will protect savers to some extent to ensure consumer-led growth can recover through 2022.

There will also be losses to the shareholders of Evergrande, unsecured lenders and some suppliers. However we do not foresee a “Lehman-style” financial crisis.

The “Evergrande” issue has recently emerged as the property sector is just about the only sector in China with lots of leverage that has not been dealt with by the regulators. Last year saw the regulators enact tools to reduce leverage in the property sector. Recent moves have tightened on lending in mortgages, lending to developers, and enforced the no-lending rule to the over-levered developers.

Evergrande is the second biggest and one of the most leveraged property developers in China. However local Chinese banks do not have a lot of exposure, and it is very clear who holds the debt loans. Evergrande is simply not big or entrenched enough to cause a systematic financial collapse. Rather, the majority of property developers are financially sound as the market is fragmented. Any developer with no access to funding will not remain solvent forever, let alone a highly levered outfit like Evergrande.

This may take some time to play out, as the Chinese government has a range of tools that it will likely deploy as needed. The government will likely let investors sweat it out first in order to provide a warning to other Chinese companies and sectors about the dangers of leverage and excess.  However Endorphin’s medium-term global and local view still remains positive for growth assets, through momentum of stimulus and consumer spending. We will continue to closely navigate the risks and volatility that will inevitably come along the way.

The team at Endorphin Wealth are passionate about helping people achieve their life goals with great financial planning. We are not licensed or owned by big banks and financial institutions. The advice and wealth management we provide is always in our client’s best interests. We have the advantage of being able to access a range of products from different providers that can be tailored to our client’s goals. We have offices located in Sydney and Melbourne, where you can find a financial advisor that is suitable for you.

For an obligation-free conversation about your financial future, please contact us on 03 9190 8964 or at advice@endorphinwealth.com.au