In recent weeks videos have surfaced of open protests in China's highly surveilled streets.
They show fomenting crowds outside the offices of Evergrande Group
At the beating heart of the unrest are Evergrande's $300 billion debts and the fact that it only has $15 billion in cash on hand.
Efforts to sell off shares of its electric vehicle division and other attempts to raise funds have come to naught. A near Manhattan's worth of floor space, amounting to $202 billion in pre-sale liabilities, sits gathering dust.
Those who've already bought into these spaces wonder if their hopes will amount to little more than exposed wires and uninsulated concrete. Contractors in these crowds wonder if they'll get paid for their work on Evergrande's 1,300 projects which span 280 Chinese cities, many of which currently lie in limbo. Meanwhile, Evergrande's employees wonder if they'll ever get paid back for their loans to the conglomerate, many of which they were compelled by the company to give.
Since Monday, which was then heralded as China's "Lehman moment," Wall Street's consensus has evolved concerning Evergrande. The risk of global financial contagion seems minimal; a triumvirate of Wall Street banks, JP Morgan
Investors were also assuaged on Wednesday, after Evergrande managed to negotiate a deal with one of its creditors on a bond interest payment which was due this week.
Meanwhile, The People's Bank of China injected 120 billion yuan into the banking system, likely to head off fears of a liquidity crisis.
Analysts largely agree Beijing has the means to settle, or in some way, restructure Evergrande's debts. The question is, at what point will they?
Evergrande's woes come as Xi Jinping's administration is attempting to iron out economic disparities in the name of "common prosperity" partly by way of the "three red lines," stringent rules that restrict developers' access to financing. As a result Evergrande's ongoing downfall is largely by design on the part of regulators.
Last week, the prominent editor of a state-run broadsheet said Evergrande should not expect a bailout because it is "too big to fail," according to Reuters. Most analysts agree that any action by Beijing would be in line with such opinions.
"We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy," reads an S&P report posted Monday. "Evergrande failing alone would unlikely result in such a scenario."
Nevertheless, conditions on the ground might compel regulators to take more drastic action should property values plummet in the event of a sweeping liquidation of Evergrande's many assets
In such an event, the mass of highly discounted properties flooding the market could sink property values, which underpin 40% of China's household wealth. Consequently, even a small correction in home prices could pose a considerable risk to the social and economic order the central government is so earnest to maintain.
"Given that the bulk of people's wealth is already in property, even a 10% correction would be a serious knock to many people," Fraser Howie, an independent analyst and co-author of books on Chinese finance, told Bloomberg. "It would certainly knock their hopes and dreams and expectations about what property is."
"The government has to be very, very careful in balancing support for Evergrande," said Yu Yong, chief risk officer at ChinaAgriculturee Reinsurance Fund, on a recent podcast with Everbright Sun Hung Kai analyst Jonas Short. "Property is the biggest bubble that everyone has been talking about in China, "So if anything happens, this could clearly cause systematic risk to the whole China economy."
On Wednesday, Bank of America downgraded its growth forecasts for China, from 8.3% to 8.0% for 2021, and from 6.2% to 5.3 for 2022.
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- 2.https://www.barrons.com/articles/china-evergrande-what-is-it-why-are-investors-worried-51632157653?mod=hp_LEAD_1_B_1
- 3.https://www.bloomberg.com/news/articles/2021-09-16/china-s-nightmare-evergrande-scenario-is-an-uncontrolled-crash
- 4.https://fortune.com/2021/09/21/evergrande-collapse-crisis-biggest-losers-bondholders/
- 5.https://www.aljazeera.com/economy/2021/9/21/is-the-evergrande-meltdown-chinas-lehman-brothers-moment