Evergrande was declared to have defaulted on its debts, and the shocks of Asia’s largest fallout are vibrating throughout the world.
On Dec. 9, Fitch Ratings downgraded Evergrande and its two important subsidiaries to “restricted default” status for missed coupon payments. The company failed to pay two publicly issued bonds with a total interest amount of $82.5 million when the 6-day grace period expired.
Beijing independent economist Gong Shengli told The Epoch Times that Evergande’s downfall would lead to a cross-default crisis that could occur anywhere at any time.
He said that the CCP emphasizes maintaining stability, but that would not be the case outside of China, where actions must be under legal contracts.
Shengli said, “The authorities can hold its domestic debts [so it won’t default], but you can’t hold back the debts in US dollars. The debts in US dollars involve the big American capitalists, and it is more troublesome to deal with it. They can take many measures, such as legal proceedings, requiring you to sell assets and more.”
According to data provided by Wang Tao, head of UBS Asian Economic Research, in an article published on Sina Finance, the overall credit exposure of the banking industry to the real estate industry may be between 90 trillion yuan and 102 trillion yuan (equivalent to China’s GDP in 2020). It is equal to 28% to 32% of the banking industry’s total assets.
And as the real estate industry suffers a crisis, banks sequentially would suffer too.
On Dec. 8, US economist and senior auditor Li Hengqing told The Epoch Times that Evergrande’s current balance sheet domestic and foreign liabilities were as high as 1.97 trillion yuan, affecting hundreds of mainland banks in China.
Hengqing said, “More than 110 large domestic banks have loans to real estate companies such as Evergrande. The scale of this debt is huge. The publicly available Chinese real estate debt now exceeds 50 trillion yuan, which is 50% of China’s GDP.”
He said the Evergrande crisis would initially strike real estate developers, then creep on more than 4,000 banking companies, including six major state-owned banks.
Li Hengqing noted that the entire Chinese real estate market was too fragile, with the real estate bubble being so big that it was now in the bubble bursting stage. The economy was down, and buyers had no incentive to commit.
He also expected a chain collapse.
“When the debt of these loan holders exceeds the value of their house, everyone’s last option is to refuse to pay the mortgage and then cut off the supply. Then the real estate market will collapse like an avalanche. Then it will be the banks that give real estate loans, and they will go bankrupt one by one.”
Shengli said that the situation was so dire that if the CCP did not handle the Evergrande incident properly, “the financial tsunami is beyond doubt.”
On Dec. 6, the People’s Bank of China announced that it would lower the deposit reserve ratio for banks by 0.5 percentage points on Dec. 15, 2021. About 1.2 trillion yuan, or $188.3 billion, would be released into the financial system as a result.
Li Hengqing said the action would increase the liquidity banks can lend and stabilize the banks and the real estate market. But that would not mean it could save the real estate industry.
He said, “Through the reserve requirement ratio (RRR) cut and the release of 1.2 trillion yuan, it is a drop in the bucket, and it is impossible to save the current mainland real estate market.”
Li Hengqing added, “China’s real estate industry has entered a dead end. Now unless it can stabilize the housing market and house prices, the CCP is dead.”