Evergrande: China’s developer crash & what it means for Australia (2021)

Hi and welcome back to the Snapshot Channel. I'm Sonia Briskin. Like and subscribe our channel and click the little bell icon to get the notifications. So the countdown is on. China's property sector time bomb is about to explode. In recent months the mega Chinese development company Evergrande has been sitting on the brink of collapse after failing to serve a stint of That's 400 billion Australian dollars. Bonds guaranteed by Evergrande are on the edge of default and whatever happens to Evergrande will have severe ramifications for Australia in three ways. Number one, the reduction in demand for Australia's iron ore. Number two, the reduction in demand from China for Australia's products and services. And number three, it will trigger a global credit crunch that will inevitably impact Australia. Much of the squeeze on Evergrande can be contributed to the Chinese government when it brought new rules last year known as the three red lines. Essentially this policy required developers to bring down their debt levels before they could borrow more money and these rules really did impact Evergrande quite substantially as it expanded and borrowed aggressively venturing into markets such as healthcare and theme parks. In fact Evergrande is the world's second most indebted company. In September it became clear that Evergrande had relied too heavily on borrowing when it failed to meet several big repayments and instead of bailing the company out like the Chinese government usually does in situations like this, it had instructed the founder of the company Xu Jiyin to pay from his private wealth. However there's not yet much evidence to suggest that this has in fact happened. In saying that Evergrande continues to defy widespread speculation and has managed to make these last minute repayments in the 11th hour in an effort to avoid debt default. The economists around the world have speculated that if this has indeed happened it will start a domino effect in China and internationally. The origins of these life-saving mystery payments continue to baffle economists and Evergrande is silent about it. IG markets analyst Kyle Rodda told news.com.au that while there was no clear evidence yet, he believed that Evergrande was scrambling to sell off assets and that authorities were probably trying to coordinate deals behind the doors. It is also possible that Xu Jiyin is using his own wealth to pay off debts. His estimated worth is close to $11 billion. In the worst case scenario Evergrande could simply collapse and wind up crashing property prices as investors and off-the-plan buyers flee the market. This will likely lead to a Chinese economic collapse as the China's reliance on the property market for economic growth is so huge. Experts say that the Chinese government is expected to keep a ring fence around the crisis and attempt to restructure Evergrande's debt. Beijing's policies will cause more and more highly geared developers to dump apartments and undeveloped land onto the market. This will cause property prices to collapse. Chinese households have about 60% of their wealth invested in housing and a big correction in property prices will undoubtedly lead to a huge blow in consumer confidence. In anticipation of all of this, Beijing has introduced what's called price floors. So essentially they're setting the lowest point below which prices of housing cannot fall. And the problem of course is that keeping these prices artificially inflated just simply means that the Chinese market will suffer from a long-term overhang of stock. But whatever happens, the Chinese economic activity is set to slow and here is the impact on Australia. Number one, the massive slowdown of the Chinese economy will inevitably impact the construction industry which accounts for more than half of the steel used in the country and a reduction in construction in China means a lower demand for Australia's iron ore. In China accounts for more than 70% of the global iron ore imports and more than half of those originate from Australia. Iron ore is Australia's most valuable commodity worth 149 billion Australian dollars in the 20 to 21 financial year and of the total Australian iron ore export about 75% of it went to China. Any drop in Chinese demand will therefore inevitably impact Australian economy, Australian businesses and more than 45,000 jobs. Number two, problems in China's real estate will send ripples through and across China causing a reduction in China's demand for Australia's goods and services and even without the iron ore, China is still our largest export market. And finally number three, despite the fact that Evergrande's debt is mostly localized in China, this crisis does echo the case of Lehman Brothers, a U.S. investment bank whose collapse in 2008 sent ripples throughout the world eventually leading to the global financial crisis. The U.S. Federal Reserve has also confirmed that the struggling China's real estate market will severely impact America. There is a high risk that investors and other banks across other markets will lose confidence leading to a credit crunch through the global markets. And now the latest news is that another two holders of dollar notes sold by Evergrande haven't received payment for the coupons but they have now been given 30-day grace period. So now the rest of the world all they can do is sit back, sit tight and see if Evergrande can pull any more tricks out of the hat to meet the next repayments deadline. Hope you like this episode, please don't forget to like and subscribe our channel and come back next for another exciting episode of Snapshot. Thank you!