Constructora Evergrande, tip of China’s mortgage crisis

The mortgage infrastructure that for years was seen as the engine of economic growth of China and represents 25% of the economic growth entered into crisis. The tip of the Iceberg is the unsustainable situation of the mortgage construction company Evergrande, whose weight impacts 25% of the START of that country’s financial system and that it has recognized that it does not have the capacity to meet its obligations.

The submerged volume of the glacier is the result of the millions of homes built in the most populated country in the world, which had to be abandoned, when borrowers were overwhelmed by their economic situation, Asian investment fund analysts explained. Overdue portfolios in the Chinese mortgage sector began to grow, affecting finance companies and construction companies. This is where Evergrande’s debt accumulated, amounting to 300,000 million dollars, and facing two maturities for September 20 and 23, for 84,000 million dollars.

The ministry of China Rural Housing and Urban Development, announced since last week that the construction company did not have the resources to meet its obligations. The alternative is the rescue by the government, or its bankruptcy.

“Most likely, China’s protectionist government would prevent the catastrophe and rescue him. But it will thus promote moral hazard, which means that companies that act irresponsibly by increasing their risk will continue to do so with the certainty that they will always be rescued “, explained the chief economist of Rankia Latin America, Humberto Calzada Diaz.

The Chinese Fannie Mae

Does the problem sound familiar? It is similar to the mortgage crisis in the United States that unfolded from 2006 to 2008, and which ended up developing the global financial crisis of 2009. For now, it is more like the rescue that the US government made of the investment bank Bear Stern in March 2018, and the rescue of the National Mortgage Association of that country, familiarly identified as Fannie Mae and Freddie Mac seven months later, in September 2008, explained the professor and researcher the National Polytechnic Institute (IPN) and the Autonomous University of Chapingo, Marco Antonio Duran.

Where are we going?

On September 17, the People’s Bank of China, its central bank, injected into the financial market the equivalent of 14,000 million dollars.

The objective of the transfer does not represent even a tenth of the maturities scheduled for this week, explained the Rankia expert. The intention behind this injection is to guarantee sufficient liquidity to an Asian market that could be impacted by the completion of the Evergrande rescue, or its bankruptcy, he said.

In a separate analysis, developed by the research team of the Natixis Investment Fund, they clarify that the systemic risk of the Evergrande situation will still extend into 2022.

The most relevant thing about this episode is that China’s financial authorities and supervisors manage to defuse the bombs spread throughout the infrastructure sector. Only then will they be able to dismantle a major bankruptcy, as happened in 2009.

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