News reports indicate that the troubled Chinese real estate developer,
Evergrande, has defaulted. Hopefully, this should pave the way for an orderly restructuring, especially after this long running drama has kept markets on tenterhooks for the last two months. Indeed, it is high time the Chinese powers that be put a full stop to the never ending saga surrounding Evergrande.
Moreover, the lack of transparency and accurate information about the exact steps that the firm and the authorities were taking to contain the fallout has to give away to more openness and accountability as well as responsible actions to provide investors with more clarity on the situation that is unfolding in this reality TV show like story. Indeed, the way in which the whole Evergrande matter has been handled speaks volumes (pun intended) as the “silence” of the Chinese just reinforces the perception about them being less than reliable as far as economic and political issues are concerned.
For a country that prides itself as the next superpower, dethroning the United States, the way in which China has responded and reacted to Evergrande’s problems, does not inspire confidence in its ability to handle economic and financial crises in a mature manner. Moreover, if China continues to obfuscate their way through this crisis, there would be a “day of reckoning”, which I think is starting as of today and with broader repercussions to the entire global financial system.
In a way, the Evergrande default is China’s Lehmann moment and its handling of the fallout would go a long way in making or marring its chances at staking a place at the global financial high table. Of course, we should also be relieved that at last, the ratings agencies have “bitten the bullet” and declared the firm insolvent or bankrupt, instead of the whole “will it pay or won’t it pay” guessing game that has been going on since August this year. So, hopefully, it looks like better sense has prevailed at last, though it is premature to say whether this would last going forward.
Now to the numbers. Evergrande owes its creditors more than $300 Billion in debts, which makes it the most indebted real estate firm in the entire world. While “everyone and their dog” knew that it was in trouble for almost a year now, the question as to “who would bell the cat” was the reason why it continued to teeter on the edge of bankruptcy, in a near, yet, so far, manner. While the Chinese financial authorities have been pumping liquidity into the system over the past week, it remains to be seen as to how much this would help in so far as the market reaction is concerned.
Indeed, my guess is that the markets are set for a day of turmoil and turbulence and as I write this, the Hong Kong markets open in a couple of hours. Next up are the other Asian markets, which too could crash today or next week. As I mentioned earlier, it is now up to the various stakeholders to step in and calm the jitters, instead of being coy and demure about the whole matter. This is really the time for the “adults in the room” to step in before global markets take a unprecedented hit. The reason being the lack of transparency, which means nobody knows who would be hit due to Evergrande’s default.
Another aspect of this whole saga has been the “smugness” of certain Western experts who breezily point to the Evergrande affair being a “Chinese problem” that doesn’t affect them. Indeed, while global markets were roiled in September, the subsequent months gave way to complacence and insouciance in the West, and in the United States, in particular. At least, some European nations such as Germany, acknowledged the “problem” instead of being in “denial” . Indeed, these are the key to the whole restructuring that is being touted as the Chinese response.
In other words, it is high time that the global investor community addressed that the problem exists and living in denial would not make it “go away”. This is also the reason why I believe that the Evergrande default is not a “local problem” as many are suggesting, and instead, it has the potential to “trigger” a global financial crisis. While this might seem like fear mongering, I wager that the next week would prove this assertion right, with what happens today, giving us a precursor to what happens next.
Last, keep an eye on the other “stressed” Chinese real estate firms such as Kaisa, which too have defaulted. The “contagion” from this “whole scale implosion” is leading us to a uncharted territory and this is where one needs to be cautious. Coupled with the lack of transparency and openness, without which markets, that depend on symmetries of information, it is anybody’s guess as to what happens next.
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