The country’s second-largest real estate developer, China Evergrande of Shenzhen, is facing a debt, which could lead him to default. He had warned the government of Guangdong province as early as the end of August of the need to restructure his debt. Beyond an unsurprising event in China, what lessons can be drawn from this episode?
123 billion dollars of debt
At the end of June, the group had outstanding debt of 835.5 billion yuan ($123 billion). 130 is due for repayment at the end of January, equivalent to nearly all of its cash. The information came out at the end of September, causing the group’s shares to plunge, before rebounding by more than 45% since September 25, thanks to the support of its investors and the State.
靠山, Rely on a mountain
When a company is heavily indebted, investors are less concerned about the debt than about the company’s support at the political level. In Chinese, the expression leaning on the mountain is used, 靠山. If the company has the right support, debt is not a big problem. In other words, one wonders who the real investors are, whether they are influential “red” investors or red princes. If they are among the largest interest groups close to the central government, the party can go on. A group without support is nothing. On the other hand, you have to get the right “mountain.” Some companies could develop further if they had the proper support.
When we look at Evergrande’s prominent investors, we see the right color, like almost public companies, such as 山东高速集团, Shandong High Speed Group or a private company, 苏宁Suning, a Chinese Darty, with a lot of funds close to the State.
The debt machine
Each time a hanging occurs, a few measures are enacted to contain the debt frenzy better and, at the same time, occupy the gallery. Last month, the authorities delineated three red lines in terms of indebtedness.
China has been able to develop with the help of the debt machine. A Chinese economics professor explained the growth model to me in simple words: “To invest, if you use your own money, you walk. You borrow, you drive. You make mortgages, you fly. “It must be recognized that in recent years the authorities have avoided the slippage that was apparent at the beginning of the last decade and the situation has improved.
The real estate sector benefits from better credit from financial institutions than, for example, the manufacturing industry. Developers can pledge property as collateral, use a variety of leverage, and borrow more. Of the 50 largest players in the market, half of them have a more than 80% debt load than the leaders in most economic sectors.
Evergrande is also protected for its importance
Sales of the 100 largest developers fell slightly in the first half of the year, down 1.45%. Creativity, with online sales, helped limit the damage. Above all, it was the promotions with attractive prices that brought in money. Evergrande shows rising figures, but profitability declined and affected cash flow. The Vice-Minister, economist Liu He, about Evergrande, mentioned the famous stability factor. Indeed, the group employs 140,000 people, cooperates with 8400 companies in 229 cities on 7792 projects. Its bankruptcy could affect nearly three million employees. Beijing has, of course, every interest to support the Shenzhen company.
Laundry in progress
No one is fooled! Evergrand is only the tip of the iceberg. The economy has not been doing so well in recent years; the epidemic has only accentuated the difficulties. Part of the debts will not be honored. The sector is in front of a big clean-up. Huang Qifan, who serves as government spokesman on economic matters, had already warned at a conference in the summer of 2019 that two-thirds of the 97,000 companies in the real estate sector should disappear in the next ten years. There are far too many small companies, the market is too complicated. 15% control 85%, which means that more than 80,000 companies (85%) share 15% of the market. In times of declining government revenues, small and medium-sized companies cannot expect too much local governments’ help. Huang’s prediction shows that the government is well aware of the market’s stakes and prefers to leave the small ones for a bottled sector’s clean-up.
Do politics make the economy?
Colossal debts plague China. This is nothing new! At the governmental level, a company’s debt is not a problematic factor if the right support is present. Economics does not make politics; politics makes economics?
The most interesting for the government – at various levels – will survive while the economic logic should let the others perish?
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8 October 2020