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On Thursday, the stock markets of Western European countries are growing confidently today following the rise in US indices following the results of the previous trading session. The latter rose thanks to the hopes of investors that the Republicans and Democrats in the US Congress will reach an interim agreement that will allow the country to avoid a default on public debt.
Japan’s Nikkei also closed higher on Thursday after falling for eight straight sessions. However, it closed 1.05% lower on Wednesday, “hitting its lowest level in more than two months on fears of the impact of the debt crisis in China.”
It is not just about the debt of China Evergrande Group (HK: 3333), whose stock was suspended, but also an investment in another, smaller Chinese real estate company Fantasia Holdings Group Co Ltd (HK: 1777). The company, which specializes in luxury apartments, missed a $315 million debt to creditors on Monday, raising fears that the financial difficulties that gripped the country’s huge real estate sector would not be limited to Evergrande.
Fantasia failed to pay $206 million in bonds maturing on Monday. In addition, there was a message from the property management division of Country Garden Holdings Company Ltd (HK: 2007), the second largest real estate group after Evergrande, that Fantasia was unable to pay its debt to this company in the amount of about 700 million yuan ($109 million). Fantasia said it is likely to “default on external debt.”
The rating agencies Standard & Poor’s and Moody’s warned that non-payment of the principal amount of the debt is likely to lead to the default of the company and on the remaining bonds. Fantasia was suspended on Tuesday, while Country Garden Services fell 4% on Wednesday.
Note that the residential real estate sector in China accounted for 29% of outstanding loans issued by Chinese banks in RMB in the second quarter of 2021. This sector is vital to China’s economy as it accounts for about 30% of GDP.
Not Comparable to Lehman Brothers
However, one should not rush to conclusions and call the situation in China developing according to the scenario of “Lehman Brothers”, according to experts of Allianz Global Investors.
When asked if the news about Evergrande and Fantasia would be the “tip of the iceberg,” indicating the potential for a significant drop in residential property values in China, and whether it would have a broad impact on the financial sector, analysts said no. “We consider this scenario extremely unlikely,” added the experts. – If the American authorities tried to save Lehman, then in China the opposite is true: the authorities are making an active decision to let the heavily indebted companies go bankrupt. Their intention is to avoid more leverage in the real estate sector, which has long been considered a source of economic risk. ”
Another difference between Evergrande and Lehman is that the crisis around Lehman arose at a time when many other large financial institutions in the United States were also experiencing difficulties, and now there are no systemic difficulties in the Chinese banking system.
