Evergrande Bankruptcy Sparks Concerns of Global Impact on Real Estate Sector

Evergrande has been a zombie company for two years, which are those that -in financial jargon- are understood to be so loaded with debt that, in reality, they continue to walk even though they are already dead from an economic point of view.

The Chinese real estate giant finally filed for bankruptcy this week under US law and the world is now wondering if the butterfly effect that these types of events usually cause is going to fully touch the brick globally.

Evergrande’s story has been told in chapters and this has led it to gradually deflate on the stock market. It’s worth nothing, really, because it was last suspended from trading earlier this year.

The point is that it is not the only Chinese real estate that is scaring the market. Another giant -although smaller- Country Garden has already publicly warned this week that it faces serious difficulties in returning the money to its bondholders, those investors who have the company’s debt in their hands.

It has lost 71% in the Chinese Hang Seng for the year and its shares are trading today at the equivalent (in Hong Kong dollars) of 0.09 euros.

Given this situation, analysts wonder when the Chinese government, at the head of an interventionist economy, will decide to come to their rescue, but the figures are astronomical.

It is estimated that Evergrande’s debt alone is the equivalent of 2% of Chinese GDP, some 340,000 million dollars. “Direct intervention in the residential market is needed because, despite the fact that regulatory measures have already been adopted, people continue to decide to wait to make the decision to buy a house because they believe that the crisis could get even worse,” say the manager Natixis.

The reality is that there is an alarming liquidity crisis in China that can unleash defaults that would affect the entire chain, from suppliers, to banks that grant mortgages and, ultimately, the population.

The Chinese government is aware and therefore decided surprisingly to lower interest rates to 2.5% this week, at the lows of 2014. Its objective is to reactivate the economy, encourage consumption because, contrary to what is happening in the US and Europe, inflation there fell to negative rates in July.

The collapse of Chinese real estate is the straw that breaks the camel’s back for a sector hard hit by the economic recession and the rise in rates. It is easy to understand why: less activity sells fewer houses.

The higher the cost of the mortgages, the less you buy, and this is compounded by the escalation of prices that affects builders, even though they try to pass on the increase in costs to the end customer.

Only in August the European real estate sector fell 9% (above the 7% left by the Stoxx 600). And in Spain, although the business of the Socimis has nothing to do with the residential sector, it has also led Inmobiliaria Colonial to the lowest levels of last October.

In a week it loses 5% and in the year it goes for a 15% drop. Merlin Properties, its rival, loses 11.3%.