Recovery roadblocks following the COVID-19 (coronavirus) pandemic are a dime a dozen, and include inflation; supply disruptions; labor shortages. Currently, solvency issues at China’s second-largest residential property developer, the Evergrande Group (Evergrande), threaten to send shockwaves across the global economy.
While you were out:
- In September 2021, Evergrande became delinquent on interest payments to foreign bondholders, raising eyebrows and warning signs.
- Evergrande’s balance sheet displays liabilities in excess of $300.0 billion.
- The company has nearly $6.0 billion in bond payments maturing over the next two months.
- The main goal is to reduce leverage and raise cash, all without sparking a panic.
A systemic collapse similar to Lehman Brothers is unlikely. However, the US economy’s footing is precarious; the Federal Reserve has largely exhausted its monetary policy toolbelt. A slowdown in the Chinese economy as a result of Evergrande defaulting could spillover and disrupt domestic recovery.
Blowing bubbles
Since 2008, the threat of another housing bubble has plagued global economists. Whether in domestic real estate markets or globally, financial regulators and banks alike are wary of getting caught unprepared again. Enter the coronavirus pandemic, which served to supercharge associated residential real estate, finance, and construction industries across the globe. Home prices in Toronto, New York, San Francisco, London, and Hong Kong have surged to record levels. In fact, nearly every major domestic metropolitan area has exhibited significant home price appreciation coupled with declining home affordability.
Declining affordability, rising unemployment, labor shortages, inflation, supply chain issues are the current snapshot of economic health, which is starting to look a familiar. Most of Evergrande’s creditors are unconcerned about their exposure to a default. However, a deflation in China’s housing bubble poses potential threats to the global economy, particularly associated lending and residential building industries.
Hiccoughs to recovery
Global supply chains are still struggling to meet current and backlogged demand after production stalled in 2020. Current limitations in the production and distribution capacity of goods, such as semiconductors, microchips and shipping containers, have put the global economy in a chokehold.
China is the globe’s second-largest economy and largest consumer market, home to more than 1.0 billion people and an estimated one-third of global manufacturing capacity. Evergrande defaulting risks sparking a slowdown in China’s production and consumption, disrupting the global economy and coronavirus recovery.
If it walks, quacks like a duck
Is the impending default of Evergrande, and Fantasia Holdings Group Company Limited, another Chinese real estate developer, going to cause a global financial meltdown?
Most likely not, but if the past two years have demonstrated anything, it is that the market hates uncertainty. While the current situation may look, feel, and smell like the 2008 financial crisis, one could argue that current downturns in financial markets simply reflect their pricing in this uncertainty-risk, preparing for the inevitable shock.
