Evergrande Bankruptcy Threatens Global Crash

Evergrande Bankruptcy Threatens Global Crash

The name is almost unknown in the West outside of financial expert circled, but 'Evergrande' could all too easily become the new byword for economic catastrophe. Evergrande is a giant Chinese real estate development company, which is teetering on the edge of bankruptcy. The developer, which directly or indirectly employs around four million people, has accumulated around $300 billion in debt that it cannot repay on time.

Evergrande Real Estate – or Heng Da Group in Chinese – owns more than 1,300 building projects in more than 280 cities across China. Founded by the former Chinese steel executive Xu Jiayin in southern China in 1996, it is now China’s second-biggest property developer by sales. Its businesses range from property development to wealth management.

Financial analysts have concluded that, if the company goes under, creditors will only get back between 0% and 10% of their money. Former Fitch analyst Dr. Marco Metzler is warning that the bankruptcy of real Evergrande could trigger a global financial crisis. 

Metzler, correctly predicted the bankruptcy of Mannheimer Lebensversicherung in 2003, and his two co-authors - Michael Ewy and Asia expert Duc Dam - demonstrate in detail in the report for German market screening agency DMSA that international investors alone have put around 23.67 billion US dollars into 23 bonds and three large loans for the lurching property developer. Among the already known institutional investors are such well-known addresses as Fidelity, Blackrock, UBS, Ashmore Group, Prudential, HSBC, Pictet, Vontobel, BNP and Allianz. "At the same time, we are far from aware of all international investors, but only 148 investors with increased reporting obligations, such as fund companies, who have invested a total of $3.44 billion, are known. There could still be some negative surprises here," believes Dr. Metzler.

"Assuming an average recovery of five percent, international investors would have to immediately write off around $22.5 billion in the event of insolvency," report author Metzler calculates. "In the worst case, some of the international investors we don't know today could then also face bankruptcy."

According to the respected Chinese business magazine Caixin, Evergrande will have to raise a total of 106 billion euros for interest and repayments within the next twelve months. With many other Chinese developers in a similar position, there are warnings that the collapse of Evergrande would have a huge knock-on effect, not merely financial but also on already strained supply chains.

UBS estimates there are 10 Chinese developers with potentially risky positions with combined contract sales of 1.86tn yuan – or 2.7 times Evergrande’s size. In other words, Evergrande is only the tip of the iceberg.

Jimmy Chang, the chief investment officer at Rockefeller Global Family Office, thinks the ripple effect could extend beyond China. He told CNBC: “If China were to have a serious economic issue because of China Evergrande, the rest of the global economy would have contagion from it.”

In the view of the report authors, a bankruptcy of Evergrande has the potential to lead to extreme disruption of the global financial system - with bankruptcies of players that are still considered rock solid today. "Triggered by a Chinese financial virus called Evergrande, the world may be facing a 'Great Reset' - the final meltdown of the current global financial system," Dr. Marco Metzler pessimistically concludes.

Such a disastrous outcome is, however, not yet guaranteed. It is very possible that the Chinese government will regard Evergrande as "too big to fail" and step in with a rescue package. The CPC may see it as an opportunity to continue with its efforts to bring rampant and irresponsible speculation under control - or it might decide that letting the whole bubble burst is the best way to achieve that. Most analysts believe that the former is more likely, in which case the crisis will probably be defused. But if they are wrong, the whole saga could be another Lehman moment, but even bigger.

What is left of world economic stability is therefore perilously dependent on the Chinese Communist Party deciding to save a giant capitalist corporation. A bigger indictment of globalise finance capitalism is hard to imagine. Keep your fingers crossed - and buy crypto and gold!