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Evergrande debt deal eases concerns for now, but realistic fears of widespread contagion persist

By on September 26, 2021 0

Last week, the fate of debt-laden Chinese real estate conglomerate Evergrande, which owes its creditors more than $ 300 billion, was on the edge of the proverbial.

The company had interest payments on two maturing bond issues. On Wednesday, he was due to pay 232 million yuan (30.5 million euros) on a national bond issue, and Thursday an additional 83.5 million (71 million euros) on a dollar-denominated bond would mature.

Would Evergrande pay the interest or not?

He kept the whole world in suspense until the very last moment. Then, on Wednesday, Evergrande announced that it had “resolved” the payment for the national bond issue.

The next day, the Bloomberg financial newswire reported that Chinese regulators had “instructed” Evergrande not to default on its dollar-denominated bonds, but confusion persists as to whether interest was actually paid on Thursday. .

Armageddon avoided, for now.

While we dodged the bullet last week, Evergrande’s issues aren’t going away anytime soon. There is another interest payment on a dollar-denominated bond, this time for $ 47.5 million, due this Wednesday.

With the Evergrande share price falling over 80% so far this year, its creditors are sure to be on the verge of a severe discount.

But why should the problems of a real estate company – even a very large one – on the other side of the world worry us in this country?

Unfortunately, in a globalized world, geographic distance offers only a very limited defense against financial and economic shocks.

If Evergrande turns out to be the harbinger of deeper problems for China, then our universities, farmers and agribusiness will be among the first in the crosshairs.

Irish universities and technological institutes have set their sights on non-European foreign students, many of whom are Chinese.

University presidents love these non-European students because they pay a much higher fee than their Irish or European counterparts.

According to the HEA, around 16,000 non-EU students were studying at Irish postgraduate institutions in 2018, or around 7% of all students. However, these international students paid 10pc of all university fees and 15pc of all college fees.

A report by economic consultants Indecon calculated that non-EU students paid 216 million euros in fees at the seven Irish universities, and that when other expenses were factored in, their total economic contribution was 336 million euros per year.

Of course, not all of these students are from China, but a lot of them are. Almost 2,700 Chinese students enrolled in Ireland for the first time in the 2019/20 academic year.

A significant reduction in the number of Chinese students would have ripple effects for developers of specialized student accommodation. While the HEA expects 55,000 new units to be commissioned by 2026, there are growing signs of caution, with DCU having already suspended a 1,200-bed project due to Covid-19.

The food and beverage industry is also watching events in China with anxiety. With demand in most of our traditional developed country markets either stagnant or at best increasing very slowly, Irish food and beverage producers were turning to the rapidly growing Chinese market.

China is now our fourth largest market, with Irish food and drink exports worth 872 million euros last year.

And it is not only the indigenous sectors of the economy that are exposed to a possible Chinese slowdown.

Last week, the Taoiseach Micheál Martin sparked some uncertainty after refusing to make commitments on Ireland’s 12.5% ​​corporate tax rate.

Are we going to raise our tax rates at the same time as the tech sector – which directly employs over 80,000 people in this country – is being crushed by the events in China?

Almost 15% of Apple’s sales come from China, while a quarter of Intel’s sales are generated in China, and an additional 15% come from Taiwan.

Dell, which also has significant operations there, does not detail its sales in China, but analysts believe the country is its second largest market after the United States.

Big tech also relies heavily on China for manufacturing, with almost all of Apple’s iPhones assembled in Shenzen, while about three-quarters of Dell’s kit is made in the country.

Same Facebook and Google, which are effectively banned from operating in China, sell advertising to Chinese state agencies and businesses aimed at users outside of China – increasing $ 5 billion for Facebook and $ 3 billion for Google.

However, while the impact of possible first and second-order effects from a Chinese collapse could be unpleasant for Ireland, any pain would be bearable and probably not so long-lasting.

What should really scare us is what Evergrande might tell us about the state of China’s banking system. The total assets of the Chinese banking system grew from 52.6 trillion yuan (then worth 6.9 trillion dollars) at the end of 2007 to 336 trillion yuan (52.5 trillion dollars) in the middle of This year.

China’s oversized banking system is now larger than those of the United States ($ 22 trillion) and the euro area (€ 25.2 trillion / $ 29.4 trillion) combined.

With a banking system growing at an average annual rate of nearly 15% for nearly a decade and a half, what other Evergrandes are lurking in China’s financial closet?

Real estate and construction now account for almost 30% of Chinese GDP – the kind of proportion we saw in Ireland and Spain before 2008.

Optimists point out that Evergrande’s dollar-denominated bonds have a face value of ‘only’ $ 20 billion, or about 6.5% of its total borrowing, and that Chinese banks are not tightly integrated into the global financial system .

This is true, but even a relatively small proportion of an absolutely huge number is still a very large number. The most recent figures from the BIS show that Chinese creditors owe just over $ 1,000 billion to foreign banks, about two-thirds of which is owed by banks and other financial firms, and the rest by foreign banks. other companies.

If we learned anything from 2008, it’s how quickly contagion spreads, once creditors start to fear they won’t get their money back.

If this happens, all bets are off. We in the West can only hope that the Chinese authorities can organize a soft landing for Evergrande.