The Chinese conglomerate Evergrande has 200,000 employees and generates 3.8 million indirect jobs. It’s an empire. And, like all empires, it tends to overspend and live on borrowed capital to support an ever-increasing structure. With interests ranging from bottled water to theme parks, the group owes about $305 billion to lenders who are increasingly convinced of the inability of China’s second-largest developer to honor its commitments.
Listed on the Hong Kong Stock Exchange, Evergrande shares retreated 10% on Monday (20), after falling more than 19% during the trading session. Since the beginning of the year, the accumulated low of papers is around 90%. And on Monday, uncertainty about what might happen with a default, default or forced debt restructuring toppled markets.
Some analysts compare the Chinese group’s possible bankruptcy to the bankruptcy of the American investment bank Lehman Brothers in September 2008. Overleveraged and unable to honor its commitments, it suffered a disastrous intervention by the American authorities. This caused an avalanche of losses in the international financial system, in what became known as the crisis of the subprime.
However, situations are different. Lehman Brothers was from the first division of international finance and had as counterparties all the minimally relevant banks in the world. Evergrande is a Chinese developer, whose activities are restricted to its country. Even so, the consequences can be drastic.
Thanks to China’s massive investments in infrastructure, the civil and heavy construction sector represents around 25% of the Gross Domestic Product (GDP). The collapse of Evergrande would expose the main risk pointed out by analysts for the Chinese economy: the excess of private and unconsolidated debt in a parallel financial system, outside the jurisdiction of the People’s Bank (the Chinese Central Bank).
This caused shock waves in the markets and Brazil was not exempt. The Ibovespa fell 2.3% and closed at 108.8 thousand points, the lowest level of the year. The dollar rose 0.8% to R$5.34 reais. In the United States, the 500-stock S&P index fell 1.7%. In Asia, another developer, Hong Kong’s Sinic Holding Company, stopped trading in its shares after an 87% drop in Monday’s trading session alone. It is worth less than the $240 million in debt that will have to be honored in the next few days.
In the case of Brazil, a crisis in the Asian construction sector has a direct impact on the stock market. The most traded share on B3 is Vale, which produces iron ore and whose main export market is China. Brazilian ore prices dropped from US$ 200 per ton to around US$ 110 per ton. Much of the iron exported by Vale feeds the Chinese appetite for new construction. If exports lose strength, there will be an impact on Vale’s shares, the Ibovespa, the exchange rate, inflation and interest rates. It’s easy to understand how the threat of the collapse of the giant Evergrande could be catastrophic.
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