![]() ![]() It sold dwellings off the plan, either through a significant deposit or a full payment, and then used the money obtained to finance further projects. Its business model has depended on the continuous inflow of money and the expectation of a continued rise in the price of apartments. Financial authorities declared that borrowers had to meet three criteria: the ratio of liabilities to assets had to be less than 70 percent net debt to equity ratios had to be below 100 percent and cash levels had to be at least equal to short-term debt.Įvergrande failed on all three. But the new regulations, characterised as “three red lines,” introduced more stringent measures. The government had for some time been seeking to halt debt accumulation, largely to little effect. It was motivated by the fear that the escalation of debt, which it had previously encouraged, was getting out of control and had to be scaled back lest it provoke a financial crisis. The Evergrande debacle was sparked by a decision last month to tighten credit regulations for highly leveraged companies, particularly in the real estate sector. ![]() “Both have operated for decades on the principle that it was worth borrowing to build, in Evergrande’s case mostly housing, in China’s case not just apartments, but roads, rail, airports and other infrastructure.” “We do not see the Evergrande crisis as China’s Lehman moment given policymakers will likely uphold the bottom line of preventing systemic risk to buy time for resolving the debt risk and push forward marginal easing for the overall credit environment.”īut despite these reassurances the Evergrande crisis does have implications for the Chinese financial system and the economy as a whole.Īs the Wall Street Journal columnist James Mackintosh commented, “Evergrande is the Chinese economy in miniature.” It cited a list of statements to the effect that China was not facing a “Lehman moment,” a reference to the collapse of the New York investment bank which led to the financial crisis of 2008.Ī comment by Judy Zhang of Citigroup was typical of many. ![]() As Bloomberg commented: “Wall Street analysts are putting their faith in the Chinese Communist Party.” This was largely on the back of assurances from major finance houses that the Chinese government had the situation under control. The sell-off was halted on Tuesday, with the S&P 500 and the Dow only marginally lower for the day. The S&P 500 index dropped by 1.7 percent with the tech-heavy NASDAQ down by 2.2 percent after falling by more than 3 percent at one stage during trading. At one stage the Dow was down by 972 points before paring back some of the losses to finish down by 614 points, a 1.8 percent decline. On Monday the Evergrande crisis triggered significant falls on global share markets with Wall Street experiencing its largest one-day fall since May. Whatever the outcome of events tomorrow, the prospect of default will continue to hang over the company as, according to the Financial Times, it has $850 million in interest payments falling due before the end of the year. Tomorrow is looming as crunch day for the beleaguered debt-burdened Chinese property developer Evergrande when interest payments on two bonds fall due.Įvergrande is up for a payment of $83.5 million in interest on an 8.25 percent five-year bond and a $36 million payment on another debt on the same day.įinancial markets have priced in the prospect of payment as unlikely with one of its bonds trading at less than 30 percent of its face value. ![]()
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