(Source: Shell Finance)
If you want to deeply and comprehensively understand the impact of the "Evergrande Incident" on China's macroeconomic trends, you must first understand the ins and outs of the event and the real reasons behind the event.
The cause of the Evergrande incident
Appearances – disorderly diversification and expansion
Lixiang - the driving force of real estate finance is insufficient
The first half of 2017-2019 is the period of Evergrande's Great Leap Forward in the national market, and it is also the highlight moment of Evergrande so far, during which Evergrande has expanded significantly, acquired a large number of project assets, and gradually formed 8 major business sectors of Evergrande Real Estate, Evergrande Automobile, Evergrande Property, Hengteng Network, Caravan Treasure, Evergrande Children's World, Evergrande Health and Evergrande Ice Spring. However, unfortunately, almost all other territories except the main business Evergrande Real Estate are in a state of loss, and high assets and high liabilities are not easy for Evergrande to digest.
From the second half of 2019 to 2020, with the "three red lines" of the property market introduced by the regulatory authorities, banks and local governments successively implementing the "housing not speculation" policy, coupled with the declining trust of market investors in Evergrande in recent years, and the domino effect of debt that affects the whole body, it eventually led to the full outbreak of Evergrande's debt crisis and continuous fermentation. At present, Evergrande can only effectively solve the debt crisis problem and ensure the smooth operation of Evergrande's fundamentals by selling all non-core assets and withdrawing funds.
In fact, evergrande debt repayment risk hidden danger problems have already begun in June this year, but at that time, it was just some rumors circulating in the small circle. In July, this sign became an explosive hot topic, quickly exploding on Weibo and Douyin, and for a time the 8 major business sections of Evergrande Group entered the center of the whirlpool of events. How to solve the problem of Evergrande's debt storm of up to 2 trillion yuan is the key to determining whether Evergrande Group can turn the danger into a disaster and tide over the difficulties.
The main trigger for the "Evergrande incident" ostensibly comes from the rapid and disorderly diversification and expansion of the group in recent years. The actual situation is that the debt financing dilemma under the financial back-up force has not been fundamentally resolved.
With the intensification of the Evergrande incident, the "Evergrande incident" has changed from the internal debt problem of Evergrande Group to a macroeconomic problem of national concern. Whether the occurrence of the "Evergrande Incident" will have a greater impact on the domestic real estate and financial markets is the focus of everyone's attention.
Yi Gang, governor of the central bank, responded to the Evergrande incident
Financial liabilities account for less than 1/3
Risks are controllable to the financial industry
Recently, Yi Gang, governor of the central bank, gave a clear reply to the reporter's question about the Evergrande incident at the 2021 G30 International Banking Seminar: "Evergrande is a real estate company, and the main risk at present is that the mature debts cannot be repaid, some construction sites are suspended, and there is uncertainty in the timely delivery of pre-sold real estate. Overall, Evergrande Risk is a case-by-case risk. In terms of countermeasures, we must first avoid evergrande's risk of spreading to other real estate enterprises. The second is to avoid risk transmission to the financial sector. Evergrande's liabilities are about 300 billion US dollars, of which one-third are financial liabilities, creditors are scattered, and collateral, and overall, the spillover of the Evergrande incident to the financial industry is controllable. Our principle of responding to the Evergrande incident is to fully respect and protect the legitimate rights and interests of creditors and property owners in strict accordance with the order of payment stipulated by law. ”
(Source: Central Bank's official website)
From the perspective of the attitude of the central bank, the Evergrande incident is only a case and does not reflect the development status and operation normality of the real estate and financial markets under the domestic macroeconomy.
The impact of the "Evergrande Incident" on China's macro economy
From the perspective of time dimension, the impact of the "Evergrande Incident" on China's macro economy can be divided into short-term, medium-term and long-term:
1. Short-term: Will the Evergrande debt storm evolve into China's version of the "Lehman moment"?
In fact, this concern is superfluous, the risk impact of Evergrande's debt storm is basically in the real estate industry, and has not expanded to other large industries, on the other hand, his impact and risk liquidity impact are also limited and controllable. In the short term, the debt structure risk of the Evergrande event is relatively dispersed, so the corresponding industry and debt risk tolerance are not concentrated, still within the controllable range, and there will be no real "Lehman moment".
In the "Evergrande Incident", as of mid-October, the scale of domestic real estate stock credit bonds was about 1.8 trillion yuan, of which about 30% were private enterprise bonds, but the overall debt risk was relatively dispersed, and there would be no fundamental impact and fluctuation on domestic real estate and finance.
2. Medium Term: Evergrande Incident – The "Minsky Moment" in the Real Estate Industry?
The Minsky Moment is the moment when asset prices collapse proposed by american economist Heyman Minsky, referring to the turning point between a market or industry on the verge of a boom and a recession. In the real estate industry experienced a vigorous development of the 20 years, each period of development, there will be a 3-4 years of real estate cycle, the current real estate industry has encountered the most stringent regulation in history, credit financing is the tightest moment, the real estate industry to obtain land and construction speed, new house sales speed are declining synchronously. In terms of land acquisition and land auction, the demand for land is declining, the land auction rate is rising, and in real estate sales, the macro adjustment of the mortgage loan policy for house purchases, the tight amount of mortgage loans, invisibly slows down the cash flow and debt repayment ability of real estate.
With the policy guidance of real estate destocking and marginal relaxation of credit regulation in 2020, the past 12 months of commercial housing sales to inventory has achieved a rapid increase in sales collection, but the profit margin has obviously declined, on the one hand, Evergrande's marketing advertising costs are rising, on the other hand, the proportion of discounted houses and activity houses has increased, on the surface, the growth rate of funds returned, but the actual income is decreasing.
3. Long-term: Will the Evergrande incident stage a Chinese version of the "Volcker Moment"?
Volcker moment, the basic understanding is to manage higher inflation by raising interest rates, tightening monetary policy and other monetary policy tightening. Judging from the Evergrande incident, the country's macroeconomic growth driven by real estate is beyond doubt. To this day, the real estate industry still shoulders the main pillar of China's economic growth. In the long run, the impact of the Evergrande incident on China's macroeconomic development will not stage a Chinese version of the "Volcker Moment", but it will leave us with a profound and long-term guiding significance of the financial real estate economy.
At a time when Evergrande's debt repayment crisis event continues to ferment, the impact of this event on China's macro economy comes more from its marginal impact on the real estate and financial sectors in a specific historical environment. It has profound guiding significance for the future development and planning of China's macro economy in the real estate market and financial market.