Evergrande - too big to fail?
Macro Insight
QuantCube detects difficult time for Evergrande
Evergrande Real Estate, China’s second largest property developer, has been facing an unprecedented debt crisis over the last year with its debt representing nearly 2% of China’s GDP. As a result, there is increasing concern that its fall would threaten the health of Chinese economy.
QuantCube used its proprietary Natural Language Processing (NLP) algorithms on social media analytics in Chinese language to track the sentiment related to Evergrande debt and the risk of defaulting.
QuantCube tailored its specific Chinese analytics for credit topics to provide early warning signals on the company’s default risk. As demonstrated in the Exhibit 1 on the right, QuantCube index shows real-time flows of information directly linked to the debt of Evergrande.
The rumors surrounding Evergrande’s inability to repay its debt had already spiked as soon as in May 2020, almost 3 months before the announcement of the “Three red lines” by the People’s Bank of China. Our Chinese social media analytics predicted on “Evergrande Group’s report on requesting support for major asset restructuring projects” approximately 6 months before rating agencies downgraded the company from B+ to B in June 2021.
Exhibit 2 shows the latest significant information that the authorities are currently trying to avoid its spillover into China’s overall real estate market since it could impact Chinese economy significantly. This is understandable as the real estate sector currently accounts for 25% of national GDP In China.
As Exhibit 3 on the right indicates, QuantCube Employment Index by Sector in China has been capturing the slowdown in Real Estate Industry since July 2020. The indicator is now showing 10% decline compared to previous year (data as of October 20th 2021).
Why are the world’s eyes on Evergrande?
Evergrande is the second largest Chinese real estate developer, and its demise would deeply impact China’s Real Estate Industry which would in turn likely impact Chinese economy. As Chinese economy is now the biggest player in the world GDP - expressed in purchasing-power parity (PPP) terms - this could significantly affect the Global economy. According to the World Bank estimate in 2020, China’s share of global PPP-based GDP is at 18.3%, above the U.S. share estimate of 15.8%. Moreover, China is considered as a systemic country that affects the global economy through its links with other countries via trade of goods and services, commodity markets and financial markets. The episode around Evergrande ignited concerns among investors considerably and provided a credential to now common understanding - when China sneezes, the global economy catches a cold. Some macroeconomic research indicates that a drop in China’s GDP by 1 percentage point would lead to a drop of 0.4 percentage point in the world GDP with a larger impact on commodity exporters and Asian countries.
