“In China, we do everything to ensure that the system doesn’t explode”, explained Jean-François Di Meglio, president of the Asia Center research institute on Tuesday, September 14 on franceinfo. Chinese real estate giant Evergrande admitted on Tuesday that it had failed to meet its obligations. Evergrande, overwhelmed by liabilities of nearly 260 billion euros, is China’s biggest real estate developer.
“In terms of liquidity, debt, relative size of projects, Evergrande is the worst off because it has bad grades everywhere.”
Francois Di Meglioto France
franceinfo: Are other groups in the same situation?
François Di Meglio: This reflects the craze for real estate in China in general and then the upward movement that hasn’t stopped for years. Real estate investment has been a safe haven. When we had savings, we invested in a second or third property, sometimes without an occupant. This gave rise to many real estate groups. Evergrande is undoubtedly the one with the most yellow cards in the assessment of its financial profile.
What does this reveal?
This tells observers that something is going to happen in this highly speculative Chinese real estate world. This does not mean that Evergrande will completely disappear, nor that the others will collapse. It’s a warning shot. We will show that we are restructuring these groups, that we have eliminated a certain number of them and that a certain number of speculators, including foreigners, are punished. Now that this debt is traded at 30% of its value, we will see whether we will favor domestic investors, small holders or whether we will still make room for foreign investors.
“Everything will be done to support Evergrande, probably not to keep it alive, but in any case not to completely dismantle the assets.”
Francois Di Meglioto France
Could this crisis have repercussions in Europe?
In China, we do our best to ensure that the system doesn’t explode. We know that it is a relatively fragile system and, if not pyramidal in any case, based on very fragile balances where we always bet on the increase in the value of assets and that is why it pushes it to get more and more indebted. When these assets start to be worth a little less, when the apartments sell a little less, you have this lack of control that is forced to be contained. Evergrande will not pay the interest on its debt, the debt does not mature in principal until 2021. So it is colossal, it is huge, it is very threatening, but we are talking about interest on the debt.
And Evergrande’s subcontractors?
They were paid with ‘monkey money’ as they were simply IOUs which were signed by Evergrande and which for a long time circulated in the Chinese system as assignats. [monnaie mise en place sous la Révolution française, qui n’était pas convertible en espèces]. The day you realize that Evergrande isn’t worth what it should be, these assignats are refused – and that’s when liquidity problems start to arise, including for subcontractors.