- Evergrande on the fence of bankruptcy, drowning in over $A400 billion in debt.
- Evergrande’s collapse could trigger the next Global Financial Crisis.
- Iron ore prices set to further plummet, driven by a fall in Chinese demand.
Evergrande, once China’s second-largest real estate developer, is now on the fence of bankruptcy and drowning in over $A400 billion in debt.
While this debt is localised in China, there is a risk this could unnerve investors and lenders in the financial and real estate sectors globally.
It’s therefore speculated that the collapse of Evergrande will ultimately have significant consequences for Australia, particularly impacting the value of iron ore, inward foreign investment, and of course, our property market.
The value of iron ore
China is the world’s biggest steel producer, accounting for approximately 70% of global iron ore imports, of which 60% is imported from Australia.
In recent times, China has set to strip back steel production in an effort to reduce carbon emissions, leading to extensive cuts in iron ore prices since July 2021.
Further contributing to the price is the collapse of the ‘too-big-to-fail’ property developer, resulting in dampened demand for construction materials, including iron ore to make steel.
Given this resource is Australia’s most valuable export commodity, worth an estimated AU$149 billion in the 2020-2021 financial year. Therefore, a fall in China’s demand for iron ore could have negative consequences for the national economy, particularly Australian export revenue, Australian businesses directly employed by the industry and associated jobs.
What does this all mean for the Australian property market?
Given Chinese households hold a large proportion of their wealth in property assets, if house prices collapsed off the back of a failed property developer, this would destroy equity. The result could be less Chinese investment in Australian real estate, and fewer Chinese students and tourists.
The inner-city real estate market in Melbourne and Sydney is currently the weakest link in the Australian property boom due to the short-term covid impact – an area typically populated with Chinese students.
This may not appear to be an issue at present given borders are closed, however, this trend may continue when international borders open.
Could this be the next GFC?
Wind back to 2007-2008 and there was an expectation the global economy would survive the collapse of Lehman Brothers, once the fourth-largest investment bank in the United States.
It didn’t.
This raises questions as to whether the collapse of Evergrande could trigger another global financial crisis.
According to Bloomberg, investors have made down payments on approximately 1.5 million properties, with buyers expressing concern about whether their money will be returned on housing projects that have been superseded.
What is Evergrande’s strategy to recover the debt?
According to the Reserve Bank of Australia (RBA), “Evergrande has: sold properties at steep discounts; sold other assets; delayed payments to suppliers, holders of its wealth management products and on some of its other liabilities; and sought to offer debt holders discounts on properties in lieu of payments.”
However, unless the Chinese government steps in to offer support through a debt restructure or guarantee, Evergrande’s strategy to increase its cash holdings may not be sufficient to avoid bankruptcy.
Without external intervention to stabilise the situation, the collapse of Evergrande will have potential disastrous local and global implications.
