Evergrande causes concern over real estate bubbles
Global financial markets have shown a jittery reaction to the prospective default of China's second-largest real estate developer Evergrande Group. The group has been pressured to pay huge sums in interest payments on its $300 billion (355 trillion won) debt. In a filing posted on China's social media platform Weibo, Wednesday, the company said it had resolved the issue of yuan-based bond interest of 42.5 billion won through "individual contacts" with relevant organizations.
However, the market jitters have grown as Evergrande failed to specify its plans for payment of the dollar-based interest of $83.5 million as of Thursday. Market watchers said the heavily-indebted developer will continue to suffer a serious liquidity crisis. As the company is obliged to pay $610 million by the end of this year, concern is increasing the group will go bust eventually. Some critics even foresee the case leading to a financial crisis, equivalent to that caused by the collapse of Lehman Brothers in the U.S. in 2008.
Evergrande has expanded its real estate businesses, borrowing money from banking institutes and individual investors with a maximum 12 percent interest rate per year. The firm has seen phenomenal growth, riding on the frenzied real estate boom. Yet, it faces a serious setback as the Chinese government began to take regulatory steps to curb loans with the goal of removing bubbles from the real estate market.
In a sense, the current crisis has been anticipated as the Chinese authorities were expected to take steps to tackle spiraling housing prices. The possible collapse of the Evergrande Group will likely have a far-flung impact on the global as well as the Chinese economy. South Korea, in particular, should pay a closer heed to the issue given the similarities in real estate markets between the two countries. Like in China, many Korean households rely heavily on debt to invest in real estate.
The Bank of Korea (BOK) vowed to closely watch the possible impact the recent case could bring about, expecting it will increase fluctuations in both the domestic and overseas financial markets. "The Evergrande case has little possibility to evolve into a systemic risk in the global financial market. But it will likely increase fluctuations in the market depending on the situation," the BOK said in a press briefing Thursday.
In China, the real estate sector accounts for 29 percent of gross domestic product (GDP), meaning the portion of real estate in entire individual assets is very high. The situation in Korea is similar, intensifying the need for the government to take pre-emptive measures to cope with possible turmoil in the real estate market while closely monitoring the Chinese situation. What is most worrisome here is the ever increasing amount of household debt.
Unlike in the past, the Chinese government is purportedly seeking to take tougher measures against insolvent enterprises regardless of their size. This means Beijing has embarked on efforts to cope with a possible burst of bubbles in the real estate market. This is also the reason why we should take comprehensive steps to minimize the fallout from the Chinese case.
Global financial markets have shown a jittery reaction to the prospective default of China's second-largest real estate developer Evergrande Group. The group has been pressured to pay huge sums in interest payments on its $300 billion (355 trillion won) debt. In a filing posted on China's social media platform Weibo, Wednesday, the company said it had resolved the issue of yuan-based bond interest of 42.5 billion won through "individual contacts" with relevant organizations.
However, the market jitters have grown as Evergrande failed to specify its plans for payment of the dollar-based interest of $83.5 million as of Thursday. Market watchers said the heavily-indebted developer will continue to suffer a serious liquidity crisis. As the company is obliged to pay $610 million by the end of this year, concern is increasing the group will go bust eventually. Some critics even foresee the case leading to a financial crisis, equivalent to that caused by the collapse of Lehman Brothers in the U.S. in 2008.
Evergrande has expanded its real estate businesses, borrowing money from banking institutes and individual investors with a maximum 12 percent interest rate per year. The firm has seen phenomenal growth, riding on the frenzied real estate boom. Yet, it faces a serious setback as the Chinese government began to take regulatory steps to curb loans with the goal of removing bubbles from the real estate market.
In a sense, the current crisis has been anticipated as the Chinese authorities were expected to take steps to tackle spiraling housing prices. The possible collapse of the Evergrande Group will likely have a far-flung impact on the global as well as the Chinese economy. South Korea, in particular, should pay a closer heed to the issue given the similarities in real estate markets between the two countries. Like in China, many Korean households rely heavily on debt to invest in real estate.
The Bank of Korea (BOK) vowed to closely watch the possible impact the recent case could bring about, expecting it will increase fluctuations in both the domestic and overseas financial markets. "The Evergrande case has little possibility to evolve into a systemic risk in the global financial market. But it will likely increase fluctuations in the market depending on the situation," the BOK said in a press briefing Thursday.
In China, the real estate sector accounts for 29 percent of gross domestic product (GDP), meaning the portion of real estate in entire individual assets is very high. The situation in Korea is similar, intensifying the need for the government to take pre-emptive measures to cope with possible turmoil in the real estate market while closely monitoring the Chinese situation. What is most worrisome here is the ever increasing amount of household debt.
Unlike in the past, the Chinese government is purportedly seeking to take tougher measures against insolvent enterprises regardless of their size. This means Beijing has embarked on efforts to cope with a possible burst of bubbles in the real estate market. This is also the reason why we should take comprehensive steps to minimize the fallout from the Chinese case.
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