By Paul Wallis
[DigitalJournal] Just about everybody in the world has been saying for years that the world’s overheated property market was a rising risk. China’s Evergrande is scaring the hell out of the property and credit markets. The group has $305 billion in debt. It’s behind on debt payments. A turgid litany of headlines is looking increasingly doom-laden.
These gigantic debts are currently “assets” to Evergrande’s lenders. Some or all of the $305 billion is on balance sheets as assets. Remove a few billion in assets from your balance sheets, and you get a mess. So a lot of major credit providers may lose those “assets” soon enough. The current bond deal scramble is just one debt, but there are many more. This issue isn’t solved, and non-payments aren’t resolved, either.
This practice of leveraging debt and borrowing against debts owed isn’t exactly new. Global markets borrow and lend on this basis. Everyone borrows and lends to everyone else. When it gets to $305 billion vanishing into thin air, however, in a volatile, all-sectors-affected market like property, the ramifications are enormous. Other companies may default. Property prices could crash.
In China, the property market is worth about 25% of the entire economy. Evergrande is the second top company in the market. A lot of Chinese and foreign finance is sunk into Evergrande, directly and indirectly.
We’re not talking about theoretical money here. The impact will be felt in hard cash, worldwide, if Evergrande collapses. A crash in the Chinese property market also has truly global reach:
Hits to property stocks could and probably would trash the related investment markets.
"Collateral damage," in the form of reduced general trade, goods, construction etc., simply due to the impact of lost money. You don’t lose six figures and rush out spending.
A lot of lost jobs for future projects across the property spectrum. Another direct physical cash hit on the real economy.
General and possibly large losses to investors and property owners due to depressed property prices. (This typically affects property market borrowers, making their credit issues a lot worse.)
Possible runs on financial institutions as investors try to bail out of risky investments or get cash to manage their commitments.
Interest rate rises due to a credit squeeze.
Much more to the point – Chinese investors in foreign markets would have to reposition to manage risk in China. The Chinese property market could be absolutely smashed.
This in turn could (and almost certainly will) mean dumping properties on the market around the world, crashing their prices. Chinese property portfolios are huge, and directly affect local property markets. (Australia is a case in point, where Chinese money helped to fuel a pretty steep range of price increases, particularly in the higher end of the market.)
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