China’s construction debt pyramid has collapsed

What has been talked about for at least 5 years has happened: The Chinese construction bubble has burst. Evergrande has reached a state of limited default because it failed to pay two coupons before the end of the grace period. It is already clear to everyone that a limited default will turn into a full default.

Along with it went to the bottom went Kaisa Group Holdings Ltd. which could not repay the coupon for 400 million dollars. These two companies account for 15% of all issued dollar bonds of Chinese developers.

It is now obvious that they were killed personally by Xi, who first started “block the air” with a credit squeeze and then showed no initiative to save these companies.

For 2021, Chinese companies defaulted on their offshore dollar bonds to the tune of $10.2 billion. Developers accounted for 36% of that amount.

The Chinese government, meanwhile, supported other healthier developers and engaged in a restructuring of the Evergrande corpse. And the logical point: the Chinese authorities plan to pay off the offshore debt of developers last, paying off the Chinese first. Evergrande’s debt was owned by all major Western funds and companies (Ashmore Group, BlackRock Inc., FIL Ltd, UBS Group AG and Allianz SE). So they are already going to sue China.

Despite the fact that the markets reacted calmly to the news of the default, we had a second real estate crisis with the downfall of many related companies. How this will affect the global economy remains to be seen.

Evergrande alone had plenty of counterparties in addition to creditors, to whom it is also heavily indebted. These outstanding debts are guaranteed to bring them into default, and so on down the chain.

Even if a full-blown crisis does not happen soon, we should definitely expect a drop in the price of all raw materials and value companies. The great Chinese construction industry has failed. And it was the driver of the world economy for the past 10 years.

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