We’ll never know for sure how he did it. But somehow, the man at the helm of the listing corporate hulk known as China Evergrande last week managed to keep his vessel afloat.
Xu Jiayin, once China’s third-richest man with a personal stash of $US30 billion ($41 billion), played it right down to the wire and kept everyone in suspense until the final minute.
Exactly 30 days into the grace period that followed the property development company’s failure last month to repay bondholders, Mr Xu stumped up the $US148 million ($202 million) owing. Failure would have meant a formal default which, in turn, would trigger a series of cross defaults on other foreign-owned debts.
That would have meant curtains for the company.
It also would have lit the fuse on a debt time bomb that has engulfed other major developers and plunged China’s $US5 trillion ($6.8 trillion) property sector into a crisis that threatens to spill over into the Middle Kingdom’s financial system and the global economy.
Australia, having shackled itself to China during the past 20 years, is already feeling the fallout.
Since May, iron ore prices have slumped 60 per cent from then-record levels, as construction and infrastructure have tanked with prices for our most valuable export last week crashing below $US90 ($123) a tonne. It’s not just iron ore. Coal prices, which last month spiked to record levels, are in free-fall.
Things are likely to get much worse before they get any better.
Credit squeeze hits home
Jubilation coursed through Asian markets on Thursday after Mr Xu temporarily plugged the hole, following rumours Beijing may attempt to head off the unfolding crisis by allowing developers to raise more debt and by encouraging mortgage lending.
But the bounce is likely to be short-lived as the potential casualty list of major developers remains. In addition to Evergrande, Kaisa Group and China Aoyuan appear to be in serious distress, while other giants including Times China Holdings, Xinyuan Real Estate, Yuzhou Group Holdings and Sunac China Holdings all have seen stock and debt prices crumble in recent months.
Meanwhile, Evergrande — the world’s most indebted developer with more than $US300 billion ($410 billion) in liabilities — has another $US255 million ($348 million) due on December 28 as funding is choked and projects abandoned, forcing the group to jettison satellite businesses just to raise cash.
And while the focus has been on its international debt commitments, it is worth remembering the vast bulk of its debt is owed to locals. Just $US19 billion ($26 billion) is in foreign debt.
To put the situation into perspective, for the past month, it has been scratching around trying to raise chump change — a mere $US148 million ($202 million) — to avoid catastrophe.
So far, at least in public, Beijing has refused to ride to the rescue. In September, it urged financiers to maintain orderly lending to the property sector in a bid to alleviate the situation. But with many developers looking hopelessly insolvent, banks are refusing to lend.
Funding for developers has dropped more than 20 per cent over the past year, with lending in October down 75 per cent from the same month last year. That’s crushed development plans and threatens to derail the broader global economy.
As the US Federal Reserve noted last week: “Given the size of China’s economy and financial system, as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States.”
Power without glory
Little wonder Xi Jinping didn’t make it to Glasgow.
Just as the property market crisis was reaching a crescendo, China found itself in the grip of a chronic energy shortage with power blackouts across two-thirds of the country, the shutdown of large swathes of industry and the prospect of insufficient heating with the onset of winter.
It largely was a Beijing-induced crisis. After banning Australian coal, the ruling party put caps on domestic coal production in order to meet emissions targets without ensuring adequate renewable energy supply.
In desperation, authorities bought large amounts of Russian gas, which created shortfalls in Europe, just as hurricanes disrupted oil supplies in the Gulf of Mexico and the global economy began recovering from the COVID-induced recession.
The problems rippling through China’s property and construction sectors are likely to seriously dent growth as they remain key employers and responsible for consuming a large chunk of the country’s massive steel output.
To compound the problems, in an effort to conserve power and to curb emissions in the lead-up to COP-26, Beijing ordered a drastic cut to steel output from the 1 billion tonnes it produced in 2020.
The end result? Crude steel output slumped to its lowest levels in four years. It fell more than 11 per cent in September from the previous month and was 21 per cent below September last year, according to the National Bureau of Statistics, going some way to explaining the dramatic drop in iron ore prices during that period.
Double trouble for Australian exports
After delivering huge profit growth this financial year and showering investors with dividends, Australia’s three biggest miners suddenly have found their stock prices sharply in reverse.
While all are in good health and still earn huge profits at prices well below $US90 ($123) a tonne, the good times rapidly appear to be drawing to a close.
According to investment bank UBS, iron ore is likely to further decline in the short term as Brazil’s shipments return to normal.
But other factors are at play as well. Scrap metal used for recycling steel is likely to play a much bigger role in the future as steel producers come under increasing pressure to reduce emissions, putting pressure on iron ore prices in the long term and, more importantly, coking coal that is used in the steel making process.
It is also likely to have an acute impact in the next few months. The energy crisis that recently shut down large parts of China’s industry, knocked out the furnaces used for recycling steel. That helped put a brake on the price declines seen since May.
After Beijing hurriedly ordered a mass ramp up of local coal production to cope with the energy crisis, the huge spike in global coal prices began to quickly unwind, as this graph shows.
It is expected that recycled metal once again will enter the market and put further pressure on iron ore prices, particularly for lower grade material.
Thermal coal prices
Source: Trading Economics
That in turn is expected to feed into iron ore prices as recycled metal once again will enter the market and diminish demand for iron ore, particularly for lower-grade material.
Both coal and iron ore prices now are in rapid descent as Beijing desperately fights economic battles on multiple fronts. Both commodities are paramount to Australia’s financial wellbeing.
While the federal government has maintained uber-conservative price estimates for both exports — pencilling in iron ore at just $US55 ($75) a tonne — the opportunity to pass off windfall gains as “sound economic management” will be dulled as it heads into an election year.
More importantly, from a strategic standpoint, the events of the past two years have highlighted the dangers of being a one-trick export pony exclusively hitched to just one wagon.
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