Evergrande Real Estate, the second largest Chinese real estate developer, had this Tuesday (21) a further drop of 11.8% in the value of its shares, reaching R$ 2 per share, the lowest price in the last six years.
The company’s crisis, however, could be observed since the beginning of the year, as the company’s shares accumulate an 84% decrease on the Hong Kong stock exchange until August 2021, which made its debt reach US$ 309 billion (about R$ 1.5 trillion), alerting the world financial market to a possible recurrence of the 2008 crisis in the USA.
The company’s president and founder, Xu Jiayin, said he is confident he will emerge from the crisis and “will present a responsible response to home buyers, investors, partners and financial institutions,” he said in an interview with AFP.
The Chinese company also has the largest debt of real estate companies. The crisis would have erupted after the Chinese government applied new guidelines against monopolies and against real estate speculation, arguing that “houses should be built to live in, not to speculate”.
The real estate sector handles 13% of the Chinese Gross Domestic Product and was responsible for 1/3 of the country’s economic growth in the last 10 years. Evergrande’s debt represents about 2% of GDP.
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For Marco Fernandes, a researcher at the Tricontinental Institute, Evergrande’s indebtedness may be the breach that the Chinese Communist Party was hoping to intervene in the real estate market in order to control rental prices and the financialization of the sector.
“Since land is a public asset in China, construction companies need to have concessions from the state, which has become a great source of revenue for the provinces and the central government. So it’s not an easy equation, the Chinese economy depends a lot on it. real estate sector”, comments the Brazilian analyst, resident in Shanghai.
About 1.5 million Chinese have real estate financing that has not yet come out of the paper. The company is responsible for around 1,300 real estate projects in 280 cities and has served more than 12 million Chinese. Xi Jinping’s administration has yet to say whether it will authorize an economic rescue of the company.
Last Saturday (18), the company’s financial unit released a statement assuring that it would begin to reimburse its investors.
Evergrande has requested the suspension of trading in its corporate bonds onshore last Thursday (16) after its rating was downgraded by China Chengxin International (CCXI), the country’s largest financial rating agency. Since June, the company has registered a continuous drop in sales of new contracts.
The researcher at the Observatory of Foreign Policy and the International Insertion of Brazil (OPEB), Giorgio Romano, also believes that President Xi Jinping should opt for intervention, as he did with the giants of the technological world and with the private sector in education. This would be one of the measures of his campaign for the 2022 elections.
“It is clear that there are limits to China’s freedom of capitalist accumulation. The objective is to frame the real estate sector and make it clear that it must be part of a national project, but the risk is great,” he says.
Another crisis like in 2008?
Since the 2008 world economic crisis, with the bankruptcy of Lehman Brothers, China has become Brazil’s main economic partner. In 2020, it was responsible for 32.4% of Brazilian exports and provided 21.9% of imports. Soy, iron and oil are the three main Brazilian products exported to the Chinese.
This week, Evergrande’s risk of “default” reduced the price of iron ore by 9% to below $100 (BRL 510) for the first time this year.
Brazil is the world leader in the production of the mineral. Last year alone, iron exports represented US$ 48.64 billion (about R$ 248 billion), according to the Brazilian Mineral Yearbook. With the fall in the stock market last Monday (20), shares of Brazilian companies such as mining company Vale, Companhia Siderúrgica Nacional, Gerdau and Usiminas also fell between 2 and 3% on the São Paulo stock exchange (Ibovespa) – lowest level since November 2020.
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“The bankruptcy should not generate a contagion effect like the Lehman Brothers case because the Chinese government has a great capacity for intervention. More than 90% of the Chinese banking system is controlled by the state. Many analysts think about the Lehman Brothers case and project scenarios without taking in says that the Chinese financial system is completely different from the US one,” he comments to Brazil in fact Professor of International Relations at the Federal University of ABC Paulista (UFABC), Giorgio Romano.
Evergrande was founded in 1996 in Guangzhou city by Xu Jiayin, who was once the richest man in China, and is now among the country’s top ten billionaires. According to the Fortune Global 500, the Chinese company would be the 122nd largest conglomerate in the world.
“The company started as a construction company, but today it has become a finance company because the way it found to roll over its debt was to refinance it with wealth management bonds, offering profits of up to 15% a year and forcing employees of the company itself to acquire them. And in recent years they have started to default”, emphasizes Marco Fernandes.
In the last 20 years, in addition to the real estate sector, the company started operating in the insurance, electric car and food sector, with the production of grains, olive oil and dairy products, forming the Evergrande Group, a conglomerate valued at US$ 360 billion (approximately R$1.8 trillion). The company has 200,000 employees, but generates around 3.8 million jobs annually.
Since 2010, the company also bought the Guangzhou FC team, which was renamed Guangzhou Evergrande, and had Luiz Felipe Scolari as coach between 2015 and 2017.
Edition: Arturo Hartmann