Could Singapore Investors Be Affected By China Evergrande’s Debt Crisis?

Made in China jokes aside, people who trade Chinese stocks know that you have to stay on your toes at all times.

Sure, they can offer explosive growth potential, but there’s always the risk that the company will go under because of some fraud (Luckin Coffee, anyone?) or government crackdown.

To be fair, these threats are present anywhere, not just China. But the ginormous levels of authority the Chinese government wields mean that crackdowns can happen swiftly and transform the business landscape overnight. In addition, China suffers from relatively high levels of business fraud, which is common in developing countries.

The latest fiasco is the Evergrande crisis that’s been splashed all over the news for a few weeks already. Even if you don’t dare to invest in Chinese stocks, there is a chance Evergrande will affect your other investments or even your life. *cue ominous music*

What is China Evergrande Group?

Evergrande is a real estate developer in China, founded in Guangzhou in 1996 and now based in Shenzhen. It’s not just any old real estate developer, but one of China’s biggest, ranked #2 in the PRC based on sales.

The company currently owns over 1,300 projects, scattered across more than 280 Chinese cities. For comparison’s sake, our own CapitaLand, one of the largest real estate developers in Asia, only owns about 600+ properties in 160+ cities worldwide.

Besides property, the group also has investments in a number of diversified industries, including electric vehicles, health, finance and… pig farms. They have their own mineral water brand promoted by Jackie Chan and also own a football team.

They even bought 50% of Singapore’s Great Eastern Life Insurance Company and renamed it Evergrande Life Assurance, although they’re now thinking of selling it to raise money.

Evergrande stocks are listed on the Hong Kong Stock Exchange. Unsurprisingly, stock prices are currently at a five-year low.

What’s the Evergrande debt crisis?

Evergrande has been involved in some crazy, massive projects in recent years, such as the construction of the biggest soccer stadium in the world and a gigantic theme park with a fake island.

But all that glitz and glamour comes at a price, and Evergrande’s debts have now swelled to the point where they’re at risk of defaulting. In fact, they’ve won the title of the world’s most indebted developer, owing a whopping $304 billion.

That kind of debt isn’t accumulated overnight. The company has been having cash flow issues for a while already. To raise money, Evergrande became the largest issuer of junk bonds in Asia. Junk bonds offer high interest rates but also carry a high risk of default. When a company releases junk bonds, that’s usually a sign they’re in trouble and desperate to raise cash.

The world only started to take notice when news of an asset freeze in one of Evergrande’s divisions leaked out in July. Asset freezes are ordered by the court to stop the company from evading its debtors by transferring out its money or assets.

Since then, life for Evergrande has been anything but grand due to a series of failures to pay and credit rating downgrades.

Fitch Ratings has downgraded Evergrande from B to C, while S&P Global Ratings has downgraded them from B+ to CC. These bad grades are not just a kiasu parent’s worst nightmare but also a real warning to investors—Fitch Rating C means there is a real possibility of default.

Evergrande’s shareholders are of course freaking out and the company’s share prices have plunged by more than 80%.

So what now? The company just announced that it will be going private and delisted from the stock exchange. Those poor hapless shareholders still left holding on to Evergrande stocks will be paid a measly $4.00 HKD for each cancelled share, which is sad when you consider that Evergrande’s share prices were over 20 HKD for most of 2018 and 2019.

Are Singapore banks involved?

When a company as big as Evergrande goes down, the knock-on effects can be huge as there are investors all over the globe who will be affected.

In addition, lenders that have disbursed money to Evergrande risk not being repaid. Even lenders that haven’t directly lent money to them might find themselves in trouble. If Evergrande defaults, many other companies are going to collapse and default, so just having exposure to China and Hong Kong could be detrimental.

Some fear that Evergrande’s collapse could take on Lehman Brothers proportions, sparking off another global financial crisis. But some analysts don’t think it will be that bad. For one thing, as a property developer, Evergrande has real estate that can be dispersed if they go bust. In other words, the big lenders can still get their money back in the form of property put up as collateral.

That being said, the Evergrande fiasco could be the sign of a deeper malaise haunting the Chinese economy. Despite the government’s narrative of prosperity, the property bubble and the abundance of empty apartment buildings and factories could be a warning of times to come.

Singapore’s three big local banks, DBS, OCBC and UOB, all operate in China and Hong Kong. Worried that they’ll be affected if Evergrande collapses, MAS has been quizzing them about their exposure.

So far, DBS has said that it has no exposure to Evergrande. However, 24% of DBS’s group assets, 28% of their group loans and 22% of their group Profit Before Tax (PBT) are from Hong Kong and Greater China.

As for OCBC, 16% of the group’s assets stem from Greater China, as well as 26% of loans and 24% of group PBT.

Meanwhile, 16% of UOB’s group loans are traced to Greater China, together with 10% of group PBT.

What should Singaporean investors take note of?

If you have banking shares, you should check if the bank has exposure to Evergrande as well as to Greater China and Hong Kong. Those are risk factors that could cause your share prices to fall if Evergrande goes down.

For those with real estate shares or REITs, you should definitely follow the Evergrande saga closely, but that doesn’t necessarily mean your share values will be affected negatively. In fact, some analysts think that developers in Singapore can benefit from Evergrande’s collapse in the long run by swooping down like vultures and picking up cheap properties in China. The downside is that in the wake of Evergrande’s collapse, the Chinese government might start regulating the property sector in China more tightly, which will negatively affect developers with Chinese projects.

More broadly speaking, if Evergrande collapses, you can expect the Singapore and China/Hong Kong stock markets to take a hit, although analysts are divided as to whether the spillover effects into Singapore will be serious. But that could also be a good time to step in and pick up stocks at bargain basement prices.