A quick note on Evergrande

CHINA ADVISORY - Report 16 Sep 2021 by Andrew Collier

The Evergrande crisis appears to be accelerating. Although the dollar bonds rose Tuesday on hopes for a better recovery rate, the overall tone is very negative. The central government has hired outside advisors to assess Evergrande’s credit situation. Morgan Stanley and Fitch have downgraded their outlook for the entire sector.

Evergrande has $300 billion in liabilities and less than $15 billion in cash and an unknown sum of outstanding obligations to lenders through the individual wealth management products that it has sold to approximately 70,000 clients, according to Redd Intelligence in Singapore. Inventory accounts for 60 percent of assets, but since it is unfinished, it would be difficult to sell. Evergrande no longer has the cash on its balance sheet from pre-sales of future apartments.

However, Beijing cannot afford to destroy the entire real estate sector. The government is actually being rather smart. Beijing is desperate to avoid a US-style financial crisis (also property related) so the country keeps edging closer to the cliff by cutting off loans and then backing off a few feet. Because the government controls the state banks, and has some control over credit such as total bond issuance, it has the ability to rein in the risks when they become too great by expanding credit.

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