Evergrande has warned it risks defaulting on its debt if it fails to raise cash, as China’s most heavily indebted property developer battles to stave off an unfolding liquidity crisis. The unusually stark wording from the company came in an interim earnings statement on Tuesday that confirmed a profit warning issued last week and outlined a series of measures to shore up its finances that include selling properties.
“The group has risks of defaults on borrowings and cases of litigation outside of its normal course of business,” Evergrande said, adding that it would pursue further asset sales, control costs and seek to attract new investors. The warning comes as Evergrande experiences the worst upheaval in its history, with a stream of recent problems raising questions over its access to financing, forcing it to sell assets and earning it an unusual public rebuke from the government over its debt risks....
For those not aware, Evergrande is the largest real estate developer in the world. And it's arguably the largest real estate developer in the largest real estate bubble in the world.
I'm sharing this because if this were to default, it could be a trigger for some much larger market turmoil. Evergrande represents potential systemic risk both in China as well as the global financial markets. IE, this defaulting could be a bit of a Lehman-esque type moment.
With that out of the way, I want to be very clear - **this is NOT likely to default*\* since the strong likelihood is that it will get a bailout due to the system wide risk attached to it for China.
With that being said, history has a lot of examples of policy mistakes, or attempts to control asset bubbles that simply end up popping the bubble. I stated this a few months ago, but the current attempt from Chinese policymakers to control debt and reduce economic risk is a tightrope walk, and there are legitimate risks of overtightening. With that said, China has a LOT of control over all the levers in their financial system, so if any country would be able to stop a cascade, it's likely China.
The result is that this is more likely to be a bottom for Chinese markets assuming it gets a bailout. But there is a small tail chance that the complete opposite happens and things really fall apart. Since that chance is larger than normal (but still not large) and the magnitude of effects are enormous if it were to occur, it's something that's worth at least being aware of.
Note: Please at least try to refrain from making this into an ideological or political debate about China. Given, sometimes these things merge into the financial realm of discussion, but at least try to take a neutral view of this.
Submitted September 02, 2021 at 09:54AM by cbus20122 https://ift.tt/3kNM2Rd
