tv Inside Story LINKTV September 27, 2021 5:30am-6:01am PDT
>> time for a quick check of the headlines. a top chinese tech executive has been released after a deal with the u.s. government to resolve fraud charges against her. she had been under house arrest since 2018. she's on her way back to china and she spoke shortly before leaving. >> my life has been turned upside down. it was disruptive time for me. as a mother and wife.
and a company executive. i believe every cloud has a silver lining. it was an invaluable experience in my life. >> joe biden says he takes responsibility for the harsh treatment of haitian migrants on the border with mexico. he promised that border patrol agents will pay after they were filmed using horse rains against people trying to cross -- cross over from mexico. the last of the migrants that were camping along the west mike scope order have left or been removed. heavy equipment was brought into clear up the site. 15,000 people had gathered their to seek asylum in the united states. catalonia's former leader has been released from italian detention. he was taken into custody by police on thursday. spain accuses him of sedition. an italian court has to consider
spain's extradition request. the next hearing is set for the beginning of october. the influential north korean leader says they are ready to end a state of war with the south. the idea of ending the war is admirable. the conflict and ended -- ended in 1953, meaning they are still technically at war. three more towns have been evacuated after explosions from a volcano on the canary islands intensified. the volcano started erecting on sunday for the first time in 50 years. more than 7000 people have fled their homes. hundreds of buildings have been destroyed by rivers of lofa. airlines have canceled flights for a second day due to a giant ash cloud. the news continues after inside story. stay tuned. goodbye for now. ♪
>> ever grand is in deep financial trouble. banks, investors, buyers, suppliers are all affected. what would a collapse of this company mean for china and the world? this is inside story. ♪ hello and welcome to the program. fears that one of china's biggest property developers could default on its debt are rippling through global markets. the vast group has outstanding debts of more than $300 billion.
building work has stopped and several investors have stopped getting paid. the company entered a 30 day grace type to make an $83 million interest payment after missing a deadline. the default of such a large company would be unprecedented for china and could send the country's outsized real estate market into freefall. it has been compared to the collapse of the lehman brothers group in the u.s., preceding the 2008 financial crisis. their financial troubles are rooted in two of huge borrowing. the company took out several loans to rapidly grow its real estate portfolio and expand into other sectors. it made millions of people homeowners in china. the project sprang up in every province. in august of last year, the chinese government imposed new borrowing limits to crackdown on debt and rain in an inflated property market.
with the coronavirus pandemic pushing down sales, the heavily indebted firm began selling off assets at large discounts. that further alarmed investors and sent shares plunging. ♪ let's introduce our guests. in london, the senior economist at capital economics. invasion, chair professor at a university and vice president at the center for china and globalization. in maine, adam hirsch, visiting economist at the economic policy institute. very warm welcome to you all. let's start in beijing. how do you think this is going to play out? is ever grand destined to default? >> first of all, ever grand problem right now is one of the biggest financial problems in
china for many years. the company, which is one of the largest property developers and also diversified into many other sectors, has accumulated huge amounts of indebtedness. allow me to emphasize that the debt incurred by ever grand is mostly debt in itself. it's not reproduced into derivatives. as what was the case in the lehman brothers financial crisis. in that sense, the ever grand debt situation is very different in many important ways compared with the international financial crisis breaking out into thousand eight. i hope china will be able to put a good handle on to this major situation. either through bankruptcy or through major restructuring. it's not going to be just one single restructuring because
ever grand has operations almost every where in china. you are talking about more than 30 provincial units of bankruptcies. you are talking about a major financial situation and i hope it will be worked out, even though it will be very painful in the process. kim: ok. do you agree with that assessment? what is your take on where things are at now? ever grand missed its deadline, worth $84 million. now there's a 30 day grace time. what does that say to you about where this is headed? 1 -- >> yeah. some kind of default of ever grand and bankruptcy is almost inevitable. if it is struggling to pay these coupon payments worth tens of millions of pounds, it has much bigger print so payments due early next year.
if it is struggling now, i don't see how it will survive for much longer. the big question then is, what kind of repercussions are there for china's economy and the world economy? the chinese government would be happy to see ever grand go bust. it has made clear that it wants to infect -- inflict pain on property developers that have been over speculating. it wants to ensure that the chinese economy and financial system get through this ok. if they allow ever grand to get bust, expect a lot of support for the broader economy and financial systems to make sure we don't have a full-blown crisis. kim: we spoke earlier, reporting about the huge borrowing that has gotten the company to this point. what other factors have been at play here? >> yeah. i think it's important to keep in mind that this huge over indebtedness of ever grand is a
symptom of problems in china's financial system. we should be clear on what's happening. the financial distress that ever grand finds itself in now is a deliberate choice of policymakers that began tightening down on property and developers in the real estate sector last year, issuing the three red lines to guide the deleveraging across the sector. it's very much by deliberate choice that chinese policymakers and financial regulators are moving ever grand towards this restructuring. i think the question that's out there is whether regulators really have the wherewithal to understand what all the linkages are, the county party risk, the contingent liability risks from a default or even an orderly workout of ever grand stats. our policymakers really are able
to make the kind of tough choices that they have been putting off for decades while china has grown so overly indebted. kim: talk to me about some of those difficult choices. what do you mean by that? >> well, china's growth has really been driven by the real estate sector over the past couple years. and the local governments which have been driving a lot of that balance sheet debt accumulation, particularly since after the great recession, are inextricably tied up with the real estate sector from the revenues that can be raised from land leases. these kind of special interests have been successful in organizing to influence policymakers in beijing against taking the kind of top measures that are needed to bring china's financial system under greater
regulation and control. it remains to be seen whether policymakers at the center will have the political will to follow through in casting off the moral hazard that has been accumulating in the system. kim: sure. i would like to get your reaction. is the situation that ever grand finds itself in symptomatic of why the problems in china are in the financial system? what role should chinese regulators and policymakers have here? >> first of all, i think he was absolutely right. this wound, which is still developing, is very much of a self-inflicted wound, partially initiated by the chinese regulators. for a few years, chinese government has been talking about not putting more money into the property market.
properties should not be for speculation, they should be used by the consumers. over the past year or so, the government has significantly cut down the excess of privately owned property developers to financing of all kinds, driving up significantly the financing costs faced by many of these property developers. and then by imposing redlines, just now mentioned. the regulators, through new regulations, sometimes suddenly imposed, made the financing very difficult. at very high cost. in the private market, financing probably will go up to 15% or even more than 20% on an annual basis. this is truly a very heavy burden for these private borrowers. and then you have a lot of third-party transactions.
that's one debt creating another debt. eventually, you are talking about a whole chain of indebtedness from one party to another party to a third party to a fourth party eventually. eventually, restructuring of ever grand, which is very big, even if we just talk about the property sector, they find the operation with multiple provinces restructuring will be a very complicated restructuring. i think it will require a lot of wisdom and courage on the part of the government regulators. as well as their suppliers, their financiers including banks. the danger is that it breaks up
and everyone rushes into carve out a piece for him or herself. and the one point which can make the bite much less painful is to do a very overarching restructuring. if you look at ever grand, it has several listed vehicles. one of them is doing quite well. whereas their main flagship listed vehicles are really tanking as we speak. the restructuring part, either through bankruptcy or voluntary restructuring, especially involving the lenders and financiers of all kinds, will be a very sophisticated exercise in order to minimize the cost to all the stakeholders. kim: it seems like you have an optimistic view, should restructuring happen. i want to come back to london. if ever grand were to default,
what flow on impact would that have, both in china but also internationally? >> yeah. it very much depends on whether they can contain the problems within china. one advantage of being a communist state is that you do have a lot more control over your financial system. it means that the chinese government could force banks to continue to lend to each other so you don't have this kind of crisis that you did following lehmans. that being said, it is certainly possible that the chinese government will inflict more pain. they could make a mistake that things aren't contained within china, you do get a financial crisis for the banking sector. you do get property developers going to the wall and people losing confidence in the property market. you do get a big hard landing in
the chinese economy. there's a couple avenues where other countries will be affected. first of all, you will get big falls in global stock markets and a reduction in risk appetite. countries that are dependent on capital inflows to fund their external deficits could be in trouble. turkey is the obvious candidate here. there are other places in south america. you see big falls in commodity prices. countries in africa, latin america, australia would be hit hard by that. assuming that there is some kind of pass-through from china's property sector to the broader economy, other countries in asia would also be affected. it is potentially quite big of things go wrong from here. kim: let's take a look at how the crisis compares with other debt defaults. in 2001, argentina defaulted on a record $95 in sovereign bonds. it's economy strong by 20% and
that led to mass unemployment and riots. in 2008, lehman brothers declared bankruptcy after owing $600 billion and that led to the global financial crisis. that then caused greece 20 about $200 billion to the eu and imf. it was given successive bailouts. i'd like to come back to you. we heard about the differences between ever grand and the lehman brothers collapse. we have heard european and u.s. banks trying to reassure their investors that their exposure is limited. is it? >> certainly, the nature of china's financial system being relatively closed has limited the exposure to external players. i think that we want to keep in mind the political context under which this crisis has unfolded.
president she is preparing to do something that is unprecedented in the modern history of china, which is to stand for a third term as party chairman and president of china. it's going to be essential for him in the run-up to the 20th party congress next year to continue demonstrating his position of control, perception of his control in this crisis with ever grand. it's really jeopardizing that image that he is trying to project. now, as they think about this, this creates a great incentive for intervening in the crisis and to make an example of ever grand. as with all financial crises, what we will see is that the regulators, even if they think
they have a handle on what ever grants financial positions are and the web that it has created throughout the property and financial economies in china and around the world, they really don't have an understanding of that. that is something we can take for granted. although there's going to be a willingness to intervene, there remains an open question whether policymakers, regulators are going to be able to do enough and fast enough to stop the contagion. once ever grand starts restructuring real estate prices in china and across the asia region, they are going to drop. outside of ever grand, every company that has liabilities backed up with real estate collateral are going to start to be seen as higher risk and
undercapitalized. this will put a damper on accessing to credit for all kinds of firms, households that have been in china that have been putting all of their life savings into real estate investments because there are few other options to save in china's economy are going to find themselves underwater, just as china is trying to make the transition from investment led growth to consumption led growth , just as china is trying to launch a new campaign for common prosperity in the run-up to the ascension at the 20th party congress. there's going to be a tremendous amount of political pressure. kim: i want to pause you there. we will come back to talk about the president's push for common prosperity later. i would like to come back to victor gao. it's been reported that in a
way, this could have been for seen. reports that china has to property markets, one in major cities where prices are rising and another in smaller cities where oversupply has led to downward pressure and perhaps ever grand should have prefers seen this. do you see it this way? could this have been for seen? >> if you talk to different property developers in china, than they have sometimes very different philosophies and forecasts as to how the market will work out in the coming several years or couple decades. on the other hand, the megatrend is that the chinese economy is still expanding. urbanization is still increasing. there will be a need for additional houses, apartment buildings for the hundreds of millions of migrant workers who are now caught in between the
urban side of the equation versus the rural side of the equation. many of them have been working in cities for years, if not for a couple of decades. they don't have decent housing to speak of. they cramp into rented apartments and very crowded ways. the demand is there. it depends on how the chinese government and corporate's and developers really come up with a more coherent view as to how what -- how much weight they want to give to property development. the government in recent years has adopted a very negative view about property markets. they don't want people to buy extra apartments, for example. they want to limit the lending to the buyers. they want to emphasize that the properties should not be used for speculative purposes. they should be used just for housing purposes, etc. i think there's a lot that we
can really reach out for, given the need for greater urbanization in china, greater need for apartments and buildings of all kinds in china. also, they need to restructure and what kind of properties they are talking about. and then i would say, one major hurdle is that, for whatever reason, the access to finance by private developers is very much restricted. that's very artificial. i don't think this is normal. i hope the government will pay enough attention to give equal access to privately owned enterprises or developers as well as state owned under their prices. the private developers should not be discriminated in terms of access to financing, to policies . in that way, the property market should be more normalized in the macro sense. people can really expect to have
stable property markets rather than huge ups and downs in the property market. if the property market, one of the pillar industries in china, is tanking, the repercussion throughout the chinese economy will be huge. you don't know what eventually it will lead to, how much of a final blow it will inflict on the chinese economy as a whole. kim: absolutely. this idea of something that has pushed common prosperity, a crackdown to try to ease inequality by cracking down on technology as well as finance sectors, among others. he will want to soften the blow for small investors at least. will he allow ever grand to fail? >> yeah. that's a very good question. this whole crusade about common
prosperity doesn't sit very well with the state and poorer taxpayers bailing out big property conglomerates that have gotten into trouble through speculation. it's another reason to suspect why the chinese government is likely to go quite tough on ever grand and not show much sympathy towards him. i think it also brings into a broader point about china's long-term economic trajectory. many of the companies most productive companies are these tech sectors which the government has recently launched a crackdown against. if it's not prepared to allow these companies does prosper, develop, invest as it looked like a few years ago, it brings into question china's broader long-term outlook. some other companies are being
stepped on hard by the government. it may need a fairer society, a less dynamic one. that means slower growth in the long run. kim: i would like to finish with you in beijing. a lot of people bought ever grand wealth management products. promised big returns, sometimes approaching 12%. are there going to be a lot of individual investors in the last left out of pocket here? lost livelihoods, lost futures. >> unfortunately, there will be a lot of in the markets because of ever grand. if you asked me to speculate, i would say that those who bought into the corporate bond by ever grand of all kinds, they will most likely suffer a big haircut. many of its suppliers who own
accounts payable by ever grand probably will suffer another big haircut. some of the investors will prepay for their apartments in different parts of china. they will probably suffer. for most financial institutions, commercial banks in particular, i hope they are well protected by their discipline in lending to ever grand to start with. they will suffer but they will suffer less proportional to other stakeholders involved. there are falling lenders to ever grand because their vehicle is listed in hong kong stock markets. i hope they were also well protected in the sense that they use very sophisticated legal documents, try to identify where risks are, and how they can be protected. through pledges or guarantees. kim: we will have to leave it
there for time. my apologies. thank you very much for your analysis. thank you to all of our guests. thank you for watching. you can see the program again any time by visiting our website. for further discussion, go to where facebook page. you can join the conversation on twitter. from the entire team, goodbye for now. ♪
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