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Interest On Chinese Junk Debt Soars To 2013 Highs

Interest on China’s junk debt in dollars has soared in recent days to highs in 2013, to around 18%, as a result of the contagion effect of the problems of the real estate sector to meet its commitments , with Evergrande as the main focus of uncertainty for being the largest company and with the most debt among the main involved.

Only in October, the real estate agency Fantasia has defaulted on the bond that expired on the 4th, Evergrande the coupon on the 11th, Modern Land has requested a three-month postponement for a bond also on the 11th, Xinyuan has announced that it will only return 5% of the total that he had committed for the 15th and Sinic that will be unpaid on the 18th.

Most analysts insist on ruling out systemic risk , although the tension mounts. The weight of the real estate sector in Chinese GDP reaches 25% , more than it represented for Spain or Ireland before the 2008 crisis.

” The real estate market represents a very high percentage of GDP for China’s leaders to allow great damage to occur and run the risk of triggering a more serious slowdown,” warns Jaime Raga, head of customer relations at UBS AM Iberia .

Furthermore, homes are by far the most important savings vehicle in an economy where capital controls restrict citizens’ ability to invest abroad.

At the moment, the chain of consequences is, in fact, very recognizable. In addition to the rise in interest, in the first place and with greater verticality in bonds that do not achieve investment grade, is precisely added the deterioration of the rating agencies’ ratings.

Evergrande is not an isolated case: Chinese real estate companies accumulate a debt greater than Japan’s GDP
Evergrande is not an isolated case: Chinese real estate companies accumulate a debt greater than Japan’s GDP

According to Bloomberg , Chinese property developers are suffering credit rating downgrades at the fastest pace in five years , “as the recent drop in new home sales adds to concerns about the sector’s debt problems,” summarizes the report. team of analysts from the economic information agency.

Moody’s, Fitch Ratings and S&P cut Chinese real estate ratings 91 times through Sept. 30, three times the improvements since the start of 2021.

On the other hand, another symptom of the uncertainty has been the concern shown by the Chinese authorities about the health of the real estate sector, until planning a meeting with companies on Friday to learn about the risks they face in the coming months.

Great track record
In fact, different experts argue that China has a long history of managing high-level corporate problems without allowing them to become systemic risks.

“We do not believe that Evergrande, the example of excessive leverage and speculation in the Chinese real estate market, is the root of a systemic crisis”, remarks Vincent Chaigneau, director of analysis of Generali Investments, who explains that “the government [of the Asian giant ] has adopted a multiple strategy to cool down the housing market, which is working, however they will want to avoid a collapse, given the potential wealth effect and bank losses. “

“Evergrande has been grabbing the attention of both the Chinese and global markets of late: the major property developer debt crisis is a symptom of a shift in the way the Chinese authorities view the level of indebtedness in the system and reflects a greater tolerance to the possible negative economic repercussions associated with deleveraging “, Jaime Raga agrees.