Why Australia worries about the collapse of Chinese real estate giant Evergrande

Australia is increasingly concerned about the collapse of China’s real estate giant Evergrande. Key government experts predict that it will not be able to repay important debts due next year.

China’s second largest home builder owes creditors more than $ 400 billion and missed another key annual interest payment deadline to bondholders last week.

Failure to meet a November 6 due date triggered another 30-day grace period, with Evergrande previously missing three more deadlines in September and October.

Fears about the Chinese real estate market are already hitting Australia’s largest exporter, iron ore, with the spot price falling below $ 90 per ton for the first time since May 2020 in the first few months of the Covid pandemic.

As recently as July, the raw material used to make steel was worth more than US $ 200.

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Australia is increasingly concerned about the collapse of China’s real estate giant Evergrande, with key government experts predicting it will be unable to repay its debt (buildings under construction in Evergrande Cultural Tourism City in Taicang are shown).

Evergrande’s woes also occur as China makes record cuts in steel production to meet climate change goals.

The Reserve Bank of Australia found Evergrande’s debt of $ 420 billion represented two percent of China’s gross domestic product.

Its November monetary policy statement also analyzed how fixed-income markets now expect Evergrande to default on both its US dollar and Chinese renminbi-denominated bonds with further interest payment deadlines in 2022.

“The prices of US dollar bonds indicate that creditors expect to get only 25 cents back on the dollar,” the RBA note said.

In August 2020, the government of Chinese President Xi Jinping introduced a new “three red lines” policy requiring developers to sell assets, even at a low price, to avoid accumulating more unsustainable debt.

The RBA said China’s strict borrowing rules for property developers have made it difficult for Evergrande to secure funding.

“The continued efforts of the Chinese authorities to reduce debt in the real estate sector have contributed to Evergrande’s inability to secure debt financing and maintain adequate liquidity,” it said.

‘In recent months, Evergrande has found it difficult to meet a number of outstanding commitments due to poor liquidity and an inability to borrow.

“These commitments include coupon payments, particularly on its offshore bonds.”

Fears over the Chinese real estate market are already affecting Australia’s largest exporter, Eisenerz, which is a dump truck owned by the Fortescue Metals Group in Port Hedland in the Pilbara region of Western Australia)

Westpac Bank said China’s new “three red lines” policy to curb unsustainable borrowing will curb the world’s second largest economy rather than the possible collapse of Evergrande.

“While Evergrande’s financial position continues to make all the headlines, the bigger problem facing China’s economy is the time it takes for the overall housing sector to digest the 2020 regulatory changes,” it said.

Westpac senior economist Justin Smirk said the record annual slump in Chinese steel production was even worse than it was in 2008 during the height of the global financial crisis.

“We are closely monitoring the unfolding correction in Chinese steel prices – if this continues, it could mark the beginning of a second fall in iron ore prices,” he said.

Evergrande called for a trading freeze on its onshore bonds in September and has only traded through negotiated transactions ever since.

The Reserve Bank of Australia found Evergrande’s debt of $ 420 billion represented two percent of China’s gross domestic product. Its November monetary policy statement also analyzed how bond markets now expect Evergrande to default on both its US dollar and Chinese renminbi-denominated bonds with longer interest payment periods in 2022

Earlier this month, Reserve Bank of Australia Deputy Governor Guy Debelle said the collapse of Evergrande was a real possibility as the Chinese Communist Party government was less willing to bail it out.

Evergrande’s billionaire founder Xu Jiayin was at the center of a political storm in Australia in March 2015 after it was revealed that China’s 15th

“My assessment of how this will play out is entirely in the hands of the Chinese authorities,” he told the House of Representatives Economic Committee.

“We spend a lot of time looking at this.”

Billionaires in China have also been targeted as part of President Xi’s “shared prosperity” policy to redistribute wealth from the ultra-rich.

Evergrande’s billionaire founder Xu Jiayin was at the center of a political storm in Australia in March 2015 after it was revealed that China’s 15th richest man failed to apply for permission to buy Villa del Mare, a $ 39 million mansion in Point Piper.

This stretch of port from Sydney’s eastern suburbs was the home of future Prime Minister Malcolm Turnbull and the founder of Aussie Home Loans, John Symond.

Mr. Xu, who founded Evergrande in 1996, loved this chic zip code, where mansions with a pontoon for the boat are much more common than mega high-rise apartments.

He bought a six-bedroom Mediterranean-style home on Wolseley Road in Australia’s most expensive and exclusive suburb in breach of the Foreign Investment Review Board’s rules for foreigners buying residential property.

His company is largely responsible for ensuring that China now houses 65 million vacant homes, with enough housing to house 90 million people in a country of 1.4 billion people.

He bought a six-bedroom Mediterranean-style home on Wolseley Road in Australia’s most expensive and exclusive suburb in breach of the Foreign Investment Review Board’s rules for foreigners buying residential property

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