Weblog with daily updates of the news on a frugal, fair and beautiful China, from the perspective of internet entrepreneur, new media advisor and president of the China Speakers Bureau Fons Tuinstra
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Almost half a year ago the real estate giant Evergrande started to fall apart under its 300 billion US dollar debts, but the collapse – expected by many – has not yet emerged. Financial analyst Sara Hsu explains in the Commercial Observer why this collapse has not happened.
The Commercial Observer:
“The real estate market in China represents China’s main means of savings since the financial system remains underdeveloped relative to that of developed nations. Therefore, the government has a significant interest in reducing the impact of real estate downturns,” said Sara Hsu, clinical associate professor of supply chain management at the University of Tennessee at Knoxville. Hsu has written for over 30 publications on the Chinese economy. “This means that there will likely be policies put in place to reduce price volatility in the housing sector.”
China’s economic growth for 2022 is now pegged at 4.8 percent, 0.8 percentage points lower than previously expected and a marked slowdown from the 8.1 percent growth achieved in 2021, the country’s central bank announced recently. Judging from the numbers, China’s economy is experiencing lagging growth, but an anticipated financial market crisis hasn’t materialized…
“Overseas investors are angry but the amount of Evergrande’s debt borrowed from overseas investors is far less than that borrowed onshore, so the fallout will not be extensive,” she said.
Maybe the question is not whether an exploding debt bomb at a Chinese company will spread financial shrapnel abroad, but whether a similar risk lies in other economies. Is there some version of Evergrande lurking in the U.S.?
The same situation is less likely to occur in the U.S. since banks tend to lend based on close examination of credit risk. In contrast, Chinese banks still lend to some extent based on government policy direction, which in recent years has included property and infrastructure construction, according to Hsu.
Financial and political analyst Victor Shih explains how the fall of Evergrande was triggered off by new financial regulations, and why Evergrande cannot be compared to the Lehman crisis in the US, he tells at a discussion at the German MERICS institute.
China faces not only its most prominent problem Evergrande but a range of issues, says leading economist Arthur Kroeberin the New York Times. Shortage of electricity, dealing with its big tech companies and many other in-debted giants offer similar challenges. “The common feature of these crises: All were triggered by government policies,” he writes.
Arthur Kroeber:
Crushed by $300 billion in debt, Evergrande, one of China’s biggest property developers, is sliding toward bankruptcy. This has prompted fears of a wider property crash or even a financial crisis.
But this is hardly the only crisis besieging the government of Xi Jinping. An unexpected electricity shortage threatens to slow down manufacturing. And for the past year, the government has waged a fierce campaign to regulate China’s vibrant internet companies, spurring hundreds of billions of dollars in investor losses.
The common feature of these crises: All were triggered by government policies. In the eyes of Beijing, these policies are meant to fix deep structural problems in the economy and lay more solid foundations for future growth. To many outsiders, they represent a dispiriting retreat from the market-oriented reforms of the past and signal the end of China’s long economic boom. But forecasts of China’s doom are most likely mistaken, as they have so often been.
True, in the latest quarter, economic growth slowed to a crawl, growing by just 0.2 percent compared with the previous quarter. The next several months will be rockier still. Slower growth in China is unwelcome news for a global economy struggling to regain its footing after the disruptions of the Covid-19 pandemic. But over the next few years, China is likely to regain momentum — in part because of the hard work it is doing now.
The biggest immediate worry is the collapse of Evergrande. Like most Chinese property developers, it relies on two key funding sources: deposits paid by home buyers before construction and huge amounts of debt.
Evergrande’s woes result from a government campaign begun last year to force property developers to reduce their liabilities. It is the latest move in a five-year effort to bring the country’s debt under control. According to the Bank for International Settlements, China’s gross debt level, at 290 percent of G.D.P., has doubled since 2008. While that level is comparable with that of rich countries with well-developed financial systems, it is high for a middle-income country. China’s leaders know that to avoid a financial crisis or avoid a repeat of Japan’s stagnation of the 1990s — the aftermath of a big debt-fueled property bubble — growth in the future must be far less reliant on debt than it has been.
The problem is that by attacking debt in the property sector, regulators risk shutting off a powerful engine that directly or indirectly affects as much as a quarter of China’s economic growth. Problems are spreading beyond Evergrande. Other developers are having trouble repaying their debts. And the sales and construction of new housing are both falling.
Investors worldwide have been watching developments at Evergrande, China’s second largest real estate company, as it struggled to repay its gargantuan debts. But while the problems are serious, financial analyst Sara Hsu does not expect a full collapse of the giant, she tells the commercial observer.
The Commercial Observer:
Evergrande is part of a sector that comprises as much as 28 percent of China’s economy, per the Financial Times. While real estate has been in a “bubble” for the last 15 years, cracks are starting to show as a result of the government “cracking down on risky property developers,” said Sara Hsu, visiting scholar at Shanghai-based Fudan University. “I think many people are aware of the real estate bubble in China, but it has not been vulnerable because the government hasn’t allowed it to be.”
The problem is that with few other good assets to fund, “investors continue to purchase properties and prices continue to rise,” added Hsu, who is an expert in Chinese fintech, economic development, informal finance and shadow banking…
So what’s going to happen to Evergrande?
Hsu thinks the government will step in to prevent a collapse and to stabilize things.
“The government is likely to force Evergrande to repay as much of its debt as possible, and [will] step in at the last minute to shore up obligations that might create systemic risk if they are defaulted upon,” she said.
The fall down of Evergrande, China’s second largest real estate giant, has rattled global investors. Strategic analyst Sara Hsu expects its fallout will be huge in China, but its effect outside China is only marginal, she tells at NBC.
NBC:
The property sector has been central to China’s explosive growth in recent years, accounting for an estimated quarter of the GDP in a country in which high-saving households have few other safe places to invest — almost 70 percent of the Chinese household wealth is held in real estate.
But developers like Evergrande — confident that Beijing would prop them up if necessary — have become overextended, raising funds to cover current debt obligations in a “Ponzi-like manner,” Sara Hsu, a U.S.-based visiting scholar at China’s Fudan University who specializes in Chinese economic development, said in an email.
Evergrande has been trying to cut its debt for several years, and Chinese officials have long had their eye on it as a potential systemic risk. The company narrowly avoided a $13 billion cash crunch last year. This month, it again warned of a default as it scrambles to raise the money it needs to pay lenders and suppliers…
Hsu also said that while Evergrande is likely to default on its offshore bonds in the coming weeks, the impact on the U.S. economy would be minimal.
For her part, Chinese financial technology expert Sara Hsu complaint at The Diplomat “structural failures in China’s financial system. “It indicates that the main problem, over-indebtedness, is common for many large institutions in the Asian giant, both banks and state-owned companies. Likewise, it highlights that” the real estate sector in particular has experienced an increase in prices in the last 20 years “, despite the government’s efforts to curb real estate speculation.
“Even after the Evergrande problem is solved, the disease of over-indebtedness is likely to continue of China, since the debt is allowed to function without restrictions in particular areas of the economy until it is too late to avoid any type of consequences “, writes Hsu who describes the situation of the real estate giant as “a symptom, not a cause” of the problem.
The annual Hurun Global Rich List counted today more billionaires in China than in the US and India combined, says Rupert Hoogewerf, chairman of the Shanghai-based Hurun Report after its publication on Wednesday, to Caixin. In 2019, China created 182 billionaires, three times the number as those in the U.S., according to the Hurun Report.
Caixin:
Despite a slowdown in the economy and trade tensions with the U.S., China had 799 billionaires in 2019, more than both the U.S. and India put together, according to the annual Hurun Global Rich List, which measured the wealth of some 2,816 billionaires from 71 countries and regions. “China today has more billionaires than the U.S. and India combined,” said Rupert Hoogewerf, chairman of the Shanghai-based Hurun Report, which published the rankings Wednesday. He added that a boom in tech valuations and strong stock markets in China, the U.S. and India pushed the number of global billionaires to a record high of 2,816. In 2019, China created 182 billionaires, three times the number as those in the U.S., according to the Hurun Report. Alibaba founder Jack Ma, who retired in September last year, climbed a place to become the world’s 21st richest person with a net worth of $45 billion last year, retaining his title as China’s wealthiest person. Ma ranked just ahead of Tencent’s Pony Ma with a net worth of $44 billion and Xu Jiayin of property developer Evergrande with $33 billion. An overseas pushback against Huawei and a U.S. blacklisting did not prevent the company’s founder, 76-year-old Ren Zhengfei from growing his personal fortune by 7% to $3 billion. He ranked at 903rd, the same as U.S. President Donald Trump. Amazon founder Jeff Bezos was the world’s richest man for a third consecutive year with a $140 billion fortune, according to the list.
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There was also substantial change at the top of the rich list.
Xu Jiayin, chairman of real estate developer Evergrande Group, has emerged as China’s richest man with assets worth US$43 billion.
Last year’s leader, Wang Jianlin, dropped to fifth after declines in the share price of his embattled Wanda Group saw his family’s net worth slump 28 per cent to US$23 billion.
“Overall, the Hurun Rich List has grown faster than any year since 2007, with the possible exception of 2015,” said Rupert Hoogewerf, Hurun Report chairman and chief researcher.
Evergrande is China’s largest property group by sales, and since the start of this year, the price of its shares in Hong Kong has risen by 465 per cent.
Pony Ma Huateng, founder and chief executive of Tencent took the No 2 spot on the rich list with a net worth of US$37 billion, overtaking Alibaba chief executive Jack Ma at US$30 billion, who ranked third.
Fourth on the list, and also China’s richest woman, Yang Huiyan, vice-chairman and the largest shareholder of real estate developer Country Garden, saw her wealth triple to US$24 billion.
Aside from real estate, technology names continued to dominate the wealth rankings with Baidu’s Robin Li, and NetEase’s Ding Lei both making the top 10.
“China’s entrepreneurs have come a long way. Back in 1999, when I put out the first list, I managed to rank 50 people. Today we have almost that number just from Alibaba,” said Hoogewerf.
Of the 2,130 individuals with assets above US$300 million, 43 came from Alibaba and its affiliate Ant Financial.
Xu’s reported $43 billion wealth - a gain of around $30 billion against last year - comes on the back of a surge in Evergrande’s shares, up over 450 percent so far this year amid plans to cut debt and focus on profit over scale.
The Hurun Report, established in 1999, is the leading China-based organization ranking the wealth of the country’s rich and famous, and its list gives a temperature check on the winners and losers in China.
Growth in China stabilized this year, but while the world’s second largest economy averted a hard landing, some major corporations have buckled under the weight of their debt or been sanctioned by authorities over risky investments overseas.
Wanda’s Wang - who took top spot for the last two years - dropped to fifth in the list after Wanda sold off much of the firm’s hotel and theme park assets to rivals in July, after coming under regulatory scrutiny over its high leverage.
Close behind Evergrande’s Xu were China’s top tech titans - Alibaba’s Jack Ma and Tencent Holdings Ltd’s Pony Ma, who has seen his firm’s value rise on the popularity of its WeChat messaging app and its popular online games.
The list also underlined those who have fallen from grace in corporate China.
Jia Yueting, founder of sprawling conglomerate LeEco that once looked to rival both Tesla Inc and Netflix, dropped to 1,978th place from 31st last year.
Yang Kai, chairman of embattled Huishan Dairy - 66th last year - dropped off the list entirely as his firm fights off creditors amid billions of dollars of unpaid debt.
On the up was Wuxi Pharma Tech’s Li Ge and his wife, propelled by China’s push towards drug innovation, Zhang Lei of fast-growing online news portal Toutiao and Li Shufu of carmaker Geely Automobile Holdings Ltd.
“It has been a good year for manufacturing, cars, education, TMT and healthcare,” Hurun founder Rupert Hoogewerf said.
While many of those on the 2,000-strong list were members of the National People’s Congress and Chinese People’s Political Consultative Conference, only a few were delegates at the upcoming five-yearly Party Congress that begins next week.
The fast-food chain is now aiming to have 45 per cent of its 4,500 mainland China stores located in third- and fourth-tier cities, and more than 75 per cent of those will offer a delivery service.
The ownership by China Evergrande Group of some 700 property projects in 240 mainland – mostly lower-tier – cities, appears consistent with McDonald’s strategy.
“It’s increasingly hard for McDonald’s to find good locations in China. Developers and mall operators don’t want McDonald’s anymore, they now want more Starbucks, as McDonald’s attracts the wrong crowd who look for cheaper stuff,” said Shaun Rein, founder of China Market Research Group and author of the forthcoming book The War for China’s Wallet.
Different from most other major economies, the McDonald’s Chinese business has long been in the shadow of KFC, which entered the mainland China three years earlier in 1987 and boasts better consumer recognition.
What’s more, unlike in the US, most McDonald’s stores in China are franchisee-operated so the company doesn’t own a lot of properties on the mainland. This means a strong partnership with a big developer could be a short-cut to achieve its five-year growth plan, Rein said.
Alibaba´s purchase of Guangdong´s Evergrande has put football again on the agenda. Football expert Rowan Simons tells the Economist China´s football needs to spend more on its youth in stead of buying foreign players and coaches. Evergrande did so already.
The Economist:
Rowan Simons, the author of “Bamboo Goalposts”, believes Chinese football would benefit more if the money shelled out for foreign coaches and players was spent on helping young Chinese players get really good. Evergrande has already made a big investment in this area. The club has built an enormous football academy in the southern province of Guangdong that students compare to Hogwarts, the school in the Harry Potter novels. With 2,300 students and 50 football pitches, it is China’s largest such institution, and perhaps the biggest in the world.
When the school opened in 2012 Xu Jiayin, the billionaire head of Evergrande, said, “Our long-term strategy is to use teenagers to turn Evergrande into a team of only domestic players in eight to ten years, making them stars in China, Asia and the world.” At least one other club has followed Evergrande’s lead, opening up a smaller school. Others are likely to do so if the academies are a success. The CFA has also hired Mr Beckham to promote the game to children and sell Chinese football to the rest of the world. Until the sport finds its version of Mr Yao, he’ll have to do.
Financial and political analyst Victor Shih, author of Factions and Finance in China: Elite Conflict and Inflation, discusses the current state of China’s real estate and why it has taken so long for China’s leadership to deal with this crisis. The bottoming-out process of the industry is not yet complete, he says at TaiwanPlus.
