Briefing: Evergrande crisis shows fragility of system

By Content Director Saxon East

China’s mind-boggling real estate expansion has hit a buffer with Evergrande - and with it, the global economy trembled this week.

China has enough empty real estate to fit 90 million people. Vast empty blocks the size of European towns and cities lie empty. 

The idea is that these ghost towns will eventually be filled as part of rapid economic growth that will see China overtake the US as the largest economy in the world by the end of this decade.

Others, meanwhile, worry that China has massively overexpanded and therefore faces a Japanese style property crash that will test its vast reserves and ability to prop up the system.

Evergrande is the tip of the iceberg, commentators say, as it steers closer and closer to default amid its £300bn debt pile. 

In the insurance sector, China’s largest player - Ping An - suffered a share price tumble amid fears around exposure to the property sector. It has strongly rejected claims it is exposed. 

Analysts are now turning to global banks. JP Morgan estimates that HSBC could lose nearly $19bn (£14bn) over five years and Standard Chartered nearly $4bn (£3bn) if events develop negatively.

Such an outcome would certainly roil the financial system, at the very least denting insurers’ share price and perhaps their balance sheets.

Evergrande lessons

What Evergrande teaches us once again is how interconnected the global financial system is. Not many saw the last sub-prime crisis before it was too late.

For brokers, it is a timely reminder that if they are considering selling their business, getting it away while markets remain strong is a good idea.

For private equity, it shows the risk in their business. 

The initial private equity investors are adept at selling stakes, progressively realising their investment during the course of ownership. 

The later investors are often the ones left standing when the music stops, as Candover reminds us.

In 2015, British private equity giant Candover offered $750m (£550m) for a 25% share in Towergate. It never recovered from the financial crisis. In 2018, it was placed in voluntary liquidation. 

The strongest players emerge from a financial crisis looking to gobble up distressed debt in return for equity, lining themselves up for a fortune. 

For many players though, a shake to the financial system could certainly hamper their ability to finance acquisitions and make rolling over debts potentially more expensive. 

That would impact the broking world. 

It is no wonder the eyes of the world are now on Evergrande.