Evergrande: Why Chinese company’s collapse is a ticking timebomb


The spectacular collapse of Chinese property conglomerate Evergrande could spark major issues with the price of Australia’s biggest export, iron ore.  

China’s second biggest apartment developer – which has 1,300 projects in more than 280 Chinese cities – is already more than two trillion yuan ($AU425billion) in debt.

The conglomerate is struggling to meet key interest payments which are due on Monday, as China’s Communist Party announces more cuts to steel production to achieve climate change goals.

China already has a glut of unfinished apartments and towers being blown up because developers often run out of money to finish residential projects, creating ‘ghost cities’.

However, experts believe Evergrande’s potential demise could cause major shockwaves for the global economy. 

Its possible collapse has been likened to the implosion of 161-year American financial services giant Lehman Brothers during the Global Financial Crisis in 2008.

Should the Shenzhen-based corporate giant sink, so would Chinese demand for Australian iron ore, with big miners and the share market plunging on Monday.

The valuable resource has held up strongly as China imposed sanctions on Australian barley, lobsters, beef, lamb, wine and cotton.

 

The collapse of Chinese property conglomerate Evergrande is a threat to Australia’s biggest export, iron ore (pictured is the halted construction of the Evergrande Cultural Tourism City  retail and residential development at Suzhou near Shanghai in China’s Jiangsu province)

National Australia Bank chief economist Alan Oster said an oversupply of apartments and Chinese Communist Party government directives to cut back on steel production had already caused a plunge in iron ore prices.

Why Evergrande collapse would be huge

Evergrande is China’s biggest property developer by sales

But it is also in a lot of debt owning, being $AU425billion in the red 

That is more than double the Australian government’s projected budget deficit of $161billion for 2021-22 

Chinese corporate giant owes $110billion in annual interest payments this week 

‘The long and short of it is it’s not just Evergrande, they’ve been basically trying to slow up some of the excesses in China,’ he told Daily Mail Australia.

‘It does say as you tighten up the economy, get rid of some of the bubbles there, you don’t need as much iron ore.’

As recently as July, iron ore was worth more than $US200 a metric tonne.

But a cutback in Chinese steel production saw iron ore prices fall by 21 per cent in August.

Iron ore prices are now back at $US100 a tonne for the first time in 14 months as Brazil looks set to boost supplies, two years on from the Vale tailings dam collapse.

This means China has more choice beyond having to buy the commodity from Western Australia’s Pilbara region. 

Prices for the key commodity fell by another 5.5 per cent during the weekend, following a 22 per cent plunge last week. 

IG market analyst Kyle Rodd said Evergrande’s potential collapse had stirred fears about broader economic problems in China.

CommSec equities analyst James Tao said China’s announce it would make more cuts to steel production, as part of a bid to achieve net zero carbon emissions by 2060, was battered already-struggling iron ore prices.

‘China more broadly is looking to curb their steel production – a big part of it is due to environmental reasons,’ he told Daily Mail Australia. 

Westpac was last week expecting iron ore prices to sink below $US100 a metric tonne by early 2023, a level half that of only two months ago, but that has happened a lot sooner than Australia’s second biggest bank had predicted.

Economist Justin Smirk said a ‘swift correction’ in Chinese steel production was to blame.

‘A number of factors suggest recent changes in Chinese economic policy are having a meaningful impact on steel production and thus iron ore demand,’ he said. 

China’s Ministry of Housing and Urban-Rural Development has told major banks Evergrande would be able to meet interest payments due on September 20, Bloomberg reported.

China already has a glut of apartments and towers are being blown up because developers often don't have the money to finish off the projects (pictured is a mega demolition of 14 unfinished Sunshine City II apartment towers in August at Kunming, in the Yunnan province)

China already has a glut of apartments and towers are being blown up because developers often don’t have the money to finish off the projects (pictured is a mega demolition of 14 unfinished Sunshine City II apartment towers in August at Kunming, in the Yunnan province)

Evergrande already has $AU426billion with of liabilities and is due to pay a $110million bond coupon payment this week – the annual interest a creditor is owed.

Its share price has more than halved during the past month.

In 2015, Evergrande’s founder Xu Jiayin was forced to sell his $39million Sydney Harbour mansion Villa de Mare in Point Piper because he had bought Australian property without first seeking permission from the federal government. 

The Chinese Evergrande Group has no connection whatsoever with a Melbourne-based company of the same name, Evergrande Properties Pty Ltd which is also known as Evergrande Group. 

As iron ore prices were peaking in July, Australia had a record $12.1billion trade surplus – the 43rd monthly surplus in a row. 

Australia exported a record $19.4billion worth of goods and services to China in July, helping to deliver a record rolling annual surplus of $95.6billion.

Of that, Australia had a record $87.3billion trade surplus with China in the year to July, a CommSec analysis of official data showed. 

Those Australian Bureau of Statistics figures, released on September 2, predated the plunge in iron ore prices. 

The Australian share market plunged 2 per cent on Monday but iron ore miner Fortescue Metals Group did even worse, diving by 5 per cent. 

Australian iron ore prices have already collapsed since July from $US200 a tonne to just $US120 a tonne as China cuts back on steel production (pictured is a dump truck at Port Hedland in Western Australia)

Australian iron ore prices have already collapsed since July from $US200 a tonne to just $US120 a tonne as China cuts back on steel production (pictured is a dump truck at Port Hedland in Western Australia)

Read more at DailyMail.co.uk