The Evergrande headquarters is seen in Shenzhen, southeastern China on September 14, 2021, as the Chinese property giant said it is facing “unprecedented difficulties” but denied rumours that it is about to go under.
Noel Celis | AFP | Getty Images
However, when it comes to the scale of potential impact on international financial markets, analysts point to a major difference between the Evergrande crisis and the Lehman collapse: Evergrande holds land, while Lehman held financial assets.
Evergrande has cash flow problems, but talk of systemic risks is “a bit overdone, frankly,” Rob Carnell, regional head of research for Asia-Pacific at ING, said Wednesday on CNBC’s “Squawk Box Asia.”
“Let’s face it, this is not Lehman’s, this is not LTCM,” Carnell said, referring to a large American hedge fund, Long-Term Capital Management, that failed in the 1990s. “It’s not a hedge fund with massive leveraged positions or a bank whose financial asset prices are hurtling towards zero. It’s a property development firm with quite a lot of debt, you know, 300 billion plus thereabouts in dollar terms.”
He expects that if Evergrande can get some cash flow into its physical assets, the company can finish its development projects, sell them and start paying down debt.
On Wednesday, the company’s real estate group announced it would pay the interest on time on a mainland-traded bond denominated in yuan.
“Evergrande is facing a liquidity crunch although it owns a large land bank,” Larry Hu, chief China economist at Macquarie, said in a report Tuesday. He noted the developer’s assets consist primarily of land and housing projects that are worth just over 1.4 trillion yuan ($220 billion).
The collapse of Lehman Brothers in 2008 led to a crash in financial derivatives — credit default swaps and collateralized debt obligations — “causing the market to doubt the health of other banks,” Hu said.
“But it’s quite unlikely that the Evergrande saga would cause the land price to crash,” he said. “After all, the value of land is simply more transparent and stable than financial instruments. It’s especially so in China, where local government monopolizes the land supply.”
“As the result, [the] local government has a strong incentive to stabilize land price. In the worst-case scenario, local government could even buy back land, as they did in 2014-15,” he added.
Another critical difference in Evergrande’s case is the greater level of government control and involvement in China’s real estate industry.
“Chinese banks and many other entities are government arms first, intermediators a distant second,” analysts at research firm China Beige Book said in a report Monday. “Even non-state financials can be controlled to an extent rarely seen outside China. Commercial bankruptcy is a state choice.”
“Beijing says lend, so you lend; when or even whether you get your money back is secondary,” the report said. “No Lehman-style contagion story makes sense here and therefore no Lehman Moment will there be.”
The legendary U.S. investment bank collapsed 13 years ago this month in an iconic moment of the global financial crisis. The bank underwrote tens of billions of dollars’ worth of securities backed by risky mortgages during a U.S. housing bubble. The U.S. government ultimately allowed Lehman to fail, while bailing out other financial institutions.
In China’s case, Beijing has tried to allow the market to play a greater role in the economy by letting more state-owned enterprises’ loans default.
Authorities will be patient in Evergrande’s case as they have two goals of preventing excessive risk-taking and maintaining stability in the property market, said Macquarie’s Hu.
“Policymakers would choose to wait first, then step in later to ensure an orderly debt restructuring,” he said. “A wholesale bailout is not very likely and shareholders/lenders might take a big loss. But the government would make sure that the pre-sold apartments get done and delivered to homebuyers.”
Hu also pointed to the Chinese government’s recent track record in restructuring giants such as Anbang Insurance, Baoshang Bank, HNA Group and China Huarong Asset Management. “China’s banking system has an annual profit of 1.9 [trillion yuan] and a provision of 5.4 [trillion yuan], which could easily absorb the loss from Evergrande,” he said.
In Evergrande’s case, the property developer has more direct ties to foreign investors than the bulk of China’s economy.
The company has about $19 billion in total offshore bonds outstanding, equivalent to about 9% of U.S. dollar-denominated Chinese bonds, according to investment bank UBS. Evergrande’s total liabilities of about $313 billion is about 6.5% of the total liability of China’s property sector, the report said.
The UBS analysts expect Evergrande to restructure its debt, and predict that bond prices will recover from their lows and limit contagion.
The analysts also laid out a range of possible spillover effects if Evergrande were to enter the less likely scenario of full liquidation, such as the failure of exposed banks and selling across emerging market credit.
International Monetary Fund Chief Economist Gita Gopinath told Reuters this week the organization believes “China has the tools and the policy space to prevent this turning into a systemic crisis.”
The IMF can organize bailouts for countries or regions in financial stress.
Even though public government statements in recent months have called for preventing major financial risks, Chinese authorities’ intervention is not a given.
Chinese officials have so far made few major public statements about Evergrande.
At a press conference last week, a National Bureau of Statistics spokesman said the department is monitoring the difficulties of some large real estate companies and the potential impact on the economy.
China’s real estate market, along with related industries such as construction, accounts for more than a quarter of national GDP, according to Moody’s estimates.
Bets that property prices would only rise ultimately forced many Chinese households to take out mortgages to afford homes. In the last few years, the government has tried to cool the market with measures such as restrictions on the level of debt developers can take on.
— CNBC’s Eustance Huang and Weizhen Tan contributed to this report.
European Central Bank heads into pivotal meeting with omicron infections rising
Christine Lagarde, president of the ECB, speaks at the Bank’s press conference in Frankfurt, Germany.
Boris Roessler | picture alliance | Getty Images
With inflation surging and the omicron Covid variant expected to spread through the region, the European Central Bank has the unenviable task of presenting its policy outlook for 2022 on Thursday.
The rise in the cost of living for the euro area (the 19 nations that share the euro) reached a record high of 4.9% in November, while omicron looks likely to become the dominant coronavirus strain with some European economies already locked down due to the delta variant.
“The sharp rise in infections and inflation and the emergence of the new Omicron variant has complicated the picture to an extent that the Governing Council may need more time to decide on all the details of adjusting its non-conventional policy tool,” said Dirk Schumacher, an ECB watcher with Natixis, in a recent research note.
The institution led by Christine Lagarde developed a new bond-buying program in the wake of the coronavirus in March 2020 to support the euro zone. The PEPP is due to end in March 2022 with a potential total envelope of 1.85 trillion euros ($2.19 trillion).
The ECB has also kept its asset purchase program, known as APP, amid the pandemic which has a current monthly pace of 20 billion euros. The central bank has been using this program in combination with PEPP to sustain the 19-member economy.
Schumacher added that Natixis still expects an announcement that the PEPP program will end by March and “we expect a clear signal that the APP will be used in a more flexible way.”
A big focus of this week’s meeting will be the new staff projections for inflation and growth. They show whether the inflation target of 2% will be met over the medium term, which is ultimately ECB’s primary mandate.
“I see an inflation profile which looks like a hump. So it has clearly increased over the last three quarters and we know how painful it is,” Lagarde said at a Reuters conference on Dec. 3,
“And a hump eventually declines and this is what we project for 2022,” she added.
Another key question is how the ECB will bridge the end of the PEPP program at the end of March into a more flexible and potentially larger APP without provoking major market volatility and keeping financial conditions on “favourable” terms. The ECB is expected to stress the need for flexibility.
“Flexibility, in our view, means varying purchases depending on the inflation outlook and financing conditions, i.e. preserving the principle of ‘favourable financing conditions’ that characterises the PEPP,” Spyros Andreopoulos, a senior European economist at BNP Paribas, said in a note.
“This view has been supported by recent ECB rhetoric that has emphasised the need to maintain flexibility, as opposed to pre-committing to a fixed volume of purchases.”
UK inflation hits 10-year high ahead of key Bank of England meeting
Shoppers wearing protective face masks walk through the rain on Oxford Street in London on June 18, 2020, as some non-essential retailers reopen from their coronavirus shutdown.
Tolga Akmen/AFP/Getty Images
LONDON — U.K. inflation climbed to a 10-year high in November as consumer prices continued to soar ahead of the Bank of England‘s crunch monetary policy meeting on Thursday.
The Consumer Price Index rose by 5.1% in the 12 months to November, up from 4.2% in October, which was itself the steepest incline for a decade and more than double the central bank’s target.
Economists polled by Reuters had expected a reading of 4.7% for November, and the Bank of England had projected that inflation would hit 5% in the spring of 2022 before moderating towards its 2% target in late 2023.
On a monthly basis, U.K. inflation rose 0.7% in November from October, above a Reuters poll for a 0.4% increase.
Core CPI, which excludes volatile energy, food, alcohol and tobacco prices, rose by 4% year-on-year against a Reuters forecast of 3.7%, and 0.5% month-on-month versus a 0.3% projection.
The Bank of England’s Monetary Policy Committee meets Thursday to decide whether to tighten monetary policy, with inflation surging and the labor market remaining robust, but the rapid spread of the omicron Covid-19 variant has cast fresh uncertainty over the economic recovery in the short term.
The MPC defied market expectations in November by voting 7-2 to hold interest rates at their historic low of 0.1%, but analysts are split on whether it will pull the trigger on rate hikes on Thursday in light of the emergence of omicron.
“Unfortunately for consumers, peak inflation may still be a few months off. Today’s CPI data only serves to increase the pressure on the Bank of England to raise interest rates at its MPC meeting tomorrow,” said Richard Carter, head of fixed interest research at Quilter Cheviot.
“However, the Bank of England may well decide that discretion is the better part of valour and instead opt to wait until next year given the current uncertainty surrounding the impact of the Omicron variant on the economy, coupled with the risk that further restrictions may need to be introduced before long.”
Most Chinese companies could delist from US, says TCW Group
Budrul Chukrut | LightRocket | Getty Images
Chinese companies listed on Wall Street will likely to be cut off from U.S. capital markets in the next three years as tensions between Beijing and Washington persist, says one global asset management firm.
“I think for a lot of Chinese companies listed in U.S. markets, it’s essentially game over,” David Loevinger, managing director for emerging markets sovereign research at TCW Group, told CNBC Wednesday. “This is an issue that’s been hanging out there for 20 years — we haven’t been able to solve it.”
TCW Group had $265.8 billion in assets under management as of September 30, 2021, according to the company’s website.
The U.S. Securities and Exchange Commission this month finalized rules to implement a law that would allow the market regulator to ban foreign companies listed in the U.S. from trading if their auditors do not comply with requests for information from American regulators.
The law was passed in 2020 after Chinese regulators repeatedly denied requests from the Public Company Accounting Oversight Board to inspect the audits of Chinese firms that list and trade in the United States.
Given the current level of distrust between the U.S. and Chinese governments, and with the bilateral relationship unlikely to improve anytime soon, there is “no way we are going to solve this in the next few years,” Loevinger said.
“So the reality is, I think, by 2024, most Chinese companies listed on U.S. exchanges are no longer going to be listed in the United States. Most are going to gravitate back to Hong Kong or Shanghai,” he told CNBC’s “Street Signs Asia.”
Less than six months after going public, Chinese ride-hailing giant Didi said it will start delisting from the New York Stock Exchange, and make plans to list in Hong Kong instead.
When a company delists from an exchange like the Nasdaq or the New York Stock Exchange, it loses access to a broad pool of buyers, sellers and intermediaries.
Chinese regulators were reportedly unhappy with Didi’s decision to list in the U.S. without first resolving outstanding cybersecurity concerns. Regulators told the firm’s executives to come up with a plan to delist from the U.S. due to concerns around data leakage, according to reports.
Beyond Didi, many of China’s top internet companies listed in the U.S. have already undertaken dual listings in Hong Kong. Some high-profile names include e-commerce giant Alibaba, its rival JD.com, search engine giant Baidu, gaming firm NetEase and social media giant Weibo.
“We have already hit the turning point,” Loevinger said, pointing to Didi’s delisting announcement. “I just don’t think China’s government is going to allow U.S. regulators to have unfettered access to internal auditing documents of Chinese companies.”
“And if U.S. regulators can’t get access to those documents, then they can’t protect U.S. markets from fraud,” he added.