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Company Update

30 September 2021

Economic Weekly Series - September 30, 2021

Behind The Evergrande Debt Crisis

Last week, one of world most indebted property conglomerate China Evergrande Group (Evergrande) missed its USD83.5mn coupon payment causing jitters in the market. CBOE Volatility Index (VIX Index) rose to the highest level since May-21 and equity market sell off sparked across regions from Hong Kong to Wall Street.

The liquidity problem faced by Evergrande is serious and chronic. Despite its deleveraging effort , Evergrande has become heavily reliant on the use of commercial paper (CP). The nature of CP short term maturity leaves the company more susceptible to liquidity dry up.

Refinancing its debt would be increasingly difficult as its company and subsidiaries ratings were downgraded, besides surging on its bonds yield. Furthermore, access to Chinese banks credit would also be challenging with the major banks restricted credit disbursement to the distressed company.

Not a ‘Lehman Brothers’ Story
Evergrande debt crisis is different with ‘Lehman Brothers’ story in 2008 GFC based on assets characteristics & government control.

Lehman Brothers, hold financial assets that could drop to zero in value, meanwhile Evergrande has fixed assets such as landbanks which are safer than derivative assets like CDO. In addition for Lehman Brothers case, the U.S. investment bank also took an extremely risky leverage with 30x debt to equity.

Since the property sector contributed the second largest added value to China’s GDP and key source of the household wealth, we believe that government would not let Evergrande to fail.

Assessing Risks & Impacts
If we are only looking at Evergrande alone, particularly its < USD100mn missed interest payment, the systemic risk should be relatively small given China’s banking system has annual profit of USD220bn and provision of USD830bn.

However risks are coming from slowing China’s property market and rising corporate bond defaults. As the second largest economy in the world, any shock in China’s economy would also be felt by other economies, Indonesia is no exception. China is the largest export destination and top 5 FDI contributor for Indonesia. Our regression analysis has shown that China’s GDP has unidirectional impact on Indonesia’s GDP. For every 1% change in China’s GDP would likely to be responded by 0.57-0.66% change in Indonesia’s economic output.

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