Is Evergrande taking the world with it?: Consequences of China’s real estate shock for Switzerland

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Evergrande, China’s second largest real estate group, went bankrupt. A Hong Kong court ordered the liquidation of the heavily indebted giant company. Evergrande shares fell more than 20 percent following the announcement.

China’s economy is facing a test due to the real estate crisis. This has direct and indirect effects as far as Switzerland. Blick answers the most important questions.

China’s construction industry has grown with credit for years. Evergrande has accumulated a mountain of debt worth over 300 billion euros by 2021. The group later filed for bankruptcy. In 2020, the group finally ran into difficulties as Chinese authorities responded to the industry’s rising debt by imposing restrictions on taking out loans. This led to payment defaults and project cancellations, especially at Evergrande. Falling real estate prices in China have made the situation worse. It now needs to be processed.

At the end of 2022, the Evergrande Group still employed more than 120,000 people. The workforce fell by tens of thousands last year. China’s real estate industry is in deep crisis and will shed several hundred thousand jobs in 2023. Evergrande’s sales have fallen from 62 billion francs to 22 billion francs since 2022. The group has managed to reduce its debt slightly since the peak in 2021, but equity remains negative.

Fortunately, what is currently happening in the Chinese real estate market does not have any direct consequences for the Swiss market. The Swiss housing market is stable and prices continue to rise in many places. This situation is likely to continue for a longer period of time due to low construction activity and high migration. As a result, there is no risk of mortgages suddenly becoming unaffordable.

NO. It was fateful for Evergrande that Chinese President Xi Jinping (70) decided to intervene in the events of 2021. He also wants to enable middle-class people to buy flats. Because the Chinese real estate market was overheated. The cost of a medium-sized apartment in Beijing is 20 times the average annual wage. Xi Jinping decided to restrict loans to cool the market. Such far-reaching interventions in the real estate market cannot be expected from Swiss politicians.

Swiss banks are not very active in the Chinese real estate market. But major business with wealthy private clients in Asia is more problematic. On the one hand, they may lose money themselves or, in the worst case, experience payment difficulties. This situation poses a risk of loss for Swiss banks. On the other hand, you should also expect wealthy customers to delay their transactions, which reduces banks’ profits.

Until a few years ago, the real estate sector was responsible for almost a third of economic growth in China. This driver is now lost. The economic engine of the world’s second largest economy is stalling. There is a decline in household consumption: in OECD countries, private household consumption accounts for 65 percent of gross domestic product, while in China the figure is only 38 percent. This has a direct impact on demand among Swiss industrial companies.

This is not impossible. Country Garden, China’s largest real estate group, is also in debt. The debt is around 170 billion francs. Evergrande’s bankruptcy has already had serious consequences for Chinese banks and construction companies. If Country Garden is added, China’s economy will likely be thrown into deep disarray.

In the event of liquidation of a company, a provisional liquidator and ultimately a formal liquidator will be appointed. The latter takes control and prepares to sell the company’s assets to pay off its debts. Bankruptcy administrators may recommend a debt restructuring plan to creditors if Evergrande has sufficient assets. Although Evergrande may appeal the liquidity decision, the liquidation process will continue pending a possible lawsuit.

Source :Blick