The consequence of Evergrand Debt Boom and experience for Vietnam

debt

Evergrande “debt bomb,” if it explodes, risks creating a Domino effect, causing consequences for the real estate industry and other industries, weakening the financial system and the Chinese economy.

1. The inevitable breakdown

In recent days, the $ 300 billion Evergrande “debt bomb” is a name that has been mentioned quite a lot when it has become a big concern with the risk of causing consequences for the Chinese financial system. However, Evergrande has been trying to raise capital to pay off many of its creditors and suppliers.

According to a warning from credit rating agency Fitch Ratings Inc., Evergrande’s default could significantly impact the Chinese economy, and many areas may be subject to high credit risk. It is known that banks and other financial institutions have provided Evergrande with loans worth 572 billion yuan ($88.8 billion). But the actual number may be higher, as banks are likely working indirectly with Evergrande’s suppliers, who are owed 667 billion yuan ($103 billion) in goods and services.

“Smaller banks with higher exposure to Evergrande or other vulnerable developers could face increased bad debt, depending on how any credit events related to Evergrande happened,” Fitch said.

At the same time, a sensitivity survey recently conducted by the People’s Bank of China showed that the average capital adequacy ratio of the country’s 4,000 banks would only decline modestly if the debt ratio terrible for real estate development loans increased by 15 basis points.

According to Masteri thao dien for rent, on September 15, about 40 people gathered near the entrance of Evergrande’s headquarters in Shenzhen, prompting many security personnel to be mobilized to control the situation. A few days ago, this turmoil also occurred when investors gathered to demand Evergrande repay loans and financial products.

With the troubles facing, Evergrande’s Hong Kong-listed shares (China) fell another 5% to HK$2.82 on the morning of September 15, the lowest level since January/January 15. 2014 to present.

According to a financial expert, the fact that Evergrande accumulated a massive debt of more than 300 billion USD comes from two main reasons such as:

Firstly, it comes from Evergrande’s excessive borrowing to do real estate projects, also known as “empty hands .”Secondly, multi-sector investment activities lack concentration when owning banks, football teams, electric car companies, food, media, music, almost all related industries. In the daily life of the people, Evergrande is present. In comparison, loans are the financial source to help Evergrande expand into these areas.

Since the outbreak of COVID-19, China’s real estate market has slowed down, and demand has not recovered immediately, causing Evergrande’s revenues to slow down. Since then, the company has gradually lost its ability to pay its due debts, in the context of the Chinese government requiring commercial banks to limit lending to the real estate sector to increase liability to companies.  This trend is also seen as a blow to the way Evergrande does business, with 800 projects across China still unfinished and the inability to continue borrowing has caused an enormous disaster. Realizing the difficult financial situation, many investors have sold off stocks during the past year

2. Experience For Vietnam

 As can be seen, this debt of more than 300 billion USD is equivalent to 2% of China’s GDP, and the collapse risks creating a Domino effect when investors lose confidence in the banking system and withdraw money, causing loss of money. Liquidity. Banks will have to raise interest rates to ensure capital safety, invisibly causing difficulties for the economy struggling because of the epidemic. It is said that the current Chinese economy has grown strong. The evidence is that the Chinese government has tightened regulations, working with large companies related to the technology and education sectors and asking banks to reduce lending to the real estate sector. Thus, the bankruptcy of Evergrande at this time can ultimately happen without any help from the government.

This trend also highlights the view of some experts, contrary to Fitch’s warning, that let significant corporate defaults take place, and that will be a solid foundation for a healthy financial system. More in the future, when the risks are eliminated with investors’ belief that: “The government will always save struggling companies”.

In Vietnam, there are many bonds issued by real estate companies (Estella heights for rent) in recent times and without collateral, which are said to have many potential risks that investors need to be careful of. Dr. Phong Cao, a banking and finance expert, said that many individual investors buy corporate bonds without knowing whether the money raised from the issuance will be used for exemplary purposes. At the same time, they also have very little ability to analyze financial indicators, thereby capturing the issuer’s ability to repay.

According to the research of Mr. Tran Thi Ha, Institute of Financial Strategy and Policy (Ministry of Finance), to avoid falling into a real estate default and possibly facing difficulties like the Chinese market, Vietnam needs solutions to bring about a specificity suitable for its own conditions such as:

Firstly, perfect the legal system, paying particular attention to real estate financial instruments such as issuance regulations of project bonds and issuing exchange bills. The securities are secured by real estate and establishing investment trust funds—real estate to promote and manage the real estate market to develop stably and sustainably.

Second, restructure the real estate market, develop a variety of goods, especially housing, to suit demand, overcome the supply-demand gap of goods, actively stabilize the market, and promote economic growth. Promote economic development and ensure social security. The State actively regulates the supply of real estate goods through development planning and urban construction planning, especially land supply for the primary real estate market through land allocation, land lease, and change of purpose. Using land and strengthening mid-and low-end housing projects and reducing the proportion of high-end projects to increase market liquidity.

Third, build a unified and reliable information and forecast system on the real estate market from the central to local levels as a basis for policymaking and market management; ensure that the real estate market operates openly and transparently.

Fourth, authorities need to strictly manage real estate credit, reduce speculation and rampant investment that can lead to loss of control and limit subprime loans.

Fifth, to form and create conditions for financial institutions to mobilize medium and long-term capital sources with stable interest rates for the real estate market and have flexible credit policies to create capital conditions for investors and create favorable conditions for investors. Market participants while ensuring risk prevention, helping the market develop healthy and sustainable. Sixth, potential investors need to be careful with loan capital flows to invest and adjust their investment portfolio accordingly. Besides, investors close the old investment before participating in the new investment to avoid falling into insolvency or accepting reduced profits, even selling below cost.

Written by
Umar Saeed
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