Markets have been dominated by the situation around Evergrande – one of China’s largest property developers. It employs 200,000 people but has racked up debts of $300bn and is now struggling to pay interest on loans it has taken out. It looks likely that Beijing will not step in and bail them out, as Evergrande is not considered too big to fail. The company’s troubles are proving to be a large “ripple” but at this stage not “contagion” effect. Chinese regulators have become experienced in restructuring situations. Previous similar scenarios were lengthy but largely orderly and did not result in a “Lehman-like” situation.
Evergrande’s loans and bonds are estimated to account for about 0.20% of the total banking system’s loans and bonds. Even if it completely defaulted, NPLs (non-performing loans – those in default) would increase by just 14% from the existing level of 1.8%. For reference, NPLs reached a max of 12.4% in March 2005 before dropping to a low of 0.9% in September 2011. In addition, Evergrande’s underlying property projects can, with the right management, be dismantled and managed separately thereby ensuring minimal damage to the property sector. Internationally, there are no signs of stress yet. Market volatility remains fairly tame and nothing like at the levels witnessed during 2008 crisis or the 2020 covid crash.
In the UK, the Bank of England said; “the case for higher interest rates appeared to have strengthened”, whilst Norway became the first nation in the developed world to raise rates with a +25 bps to 0.25%. And Hungary’s Central Bank raised rates 0.15% to 1.65%.
Meanwhile in Sweden, rates remain unchanged at 0% and GDP is back to pre-pandemic levels.