Panic is a buzzword in the Chinese markets these days. It all started with Evergrande and seemed to have no end sight. Major Chinese real estate players have reported being unable to pay back their debts. Sinic Holdings, Modern Land, China Properties Group and Fantasia Holdings are other names that seem to be in trouble. It now appears that the real estate sector of China is unable to breathe, weighed down by its debt pollution.
Is China exporting a financial pandemic?
As rightly said, even one collapse can set the whole pack apart like a pack of cards. This seems to apply in the case of the Chinese real estate market that is showing no signs of letting up. It all started in September 2021 with the Evergrande debt crisis. The debt line-up of Evergrande came in at around US$408 billion, and this news shook the entire world. Evergrande raised US$2 billion in cash after selling a part of its stake but failed to meet the deadline to pay US$201 million interest on bonds. To the market surprise, Evergrande paid last minute with a bond coupon.
The financial pandemic cloud is hovering on other real estate players like SINIC Holdings which defaulted on bonds worth US$246 million. The China Properties Group also defaulted on bonds worth US$226 million. In early October, Fantasia Holdings defaulted on bonds worth US$206 million. Now, these are a few names that came into the limelight and were reported in September and October. In the first half of 2021, default on corporate bonds came in at a record US$18 billion, as per Nikkei Asia. As reported by Reuters in July 2021, around 25 companies defaulted on loans taken through bonds in short bond payments.
What are bonds?
A company uses Bonds to borrow money from the market. These are fixed-income instruments that are nothing, but a loan made by an investor to a borrower, typically a corporate or government. Now, how do these bonds default? Bond defaults happen when the issuer fails to make interest or principal payments to the bondholders within the specified time. And this is what has happened in the China’s property market, where the bond issuers have run out of cash and have defaulted one by one. Bonds with a rating of AA+ have also been reported to default in China.
The question now arises: Are these companies cooking their books, or are the rating agencies inefficient in giving suitable ratings to these companies?
What is China’s Debt Proportion?
As reported by China's National Institution for Finance and Development (NFID), the nation's overall debt stands at 270.1 per cent of gross domestic product (GDP) at the end of 2020, up from 246.5 per cent at the end of 2019.
China's external debt
Source: China’s State Administration of Foreign Exchange
How much does China owe to the rest of the world? As per Institute of International Finance’s January 2021 report, China’s outstanding debt claims increased from about US$1.6 trillion in 2006 to more than US$5.6 trillion as of mid-2020, making China one of the biggest creditors to low-income countries. The nation’s overall debt stands at 270.1 per cent of gross domestic product (GDP) at the end of 2020.
These figures are scary and does come with a lot of concern as to how will China cope up with it and will it cripple the world economy at large. Though these debt defaults have come out in open from the real estate sector, there are chances of other hidden debts too as hinted by Standard and Poor’s in a report in 2018. Just like Coronavirus that is said to emerge from a lab in Wuhan, is there a financial pandemic in the making too?