China Evergrande Crisis: How Does This Affect Latin America?

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The Threat Of Bankruptcy Looming Over China Evergrande Not Only Affects the Chinese Real Estate Market.

Residential buildings developed by Evergrande in Pingyuan

In the early hours of Monday 20, the main stock exchanges of the world reported large losses related to the real estate market, after the fall of Evergrande shares. Photo: Wikimedia-Windmemories

LatinAmerican Post | Christopher Ramírez Hernández

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Leer en español: Crisis de China Evergrande: ¿cómo afecta la amenaza de bancarrota a Latinoamérica?

The penultimate week of September 2021 did not start in the best way, at least economically. In the early hours of Monday 20, the main stock exchanges of the world reported large losses related to the real estate market, after the fall of shares of Evergrande, one of the most important multinationals in this area, not only in China but in the world.

"China Evergrande Group, the world's most indebted real estate developer," was the definition given by the Reuters news agency about the company; and it is an appreciation that is not entirely wrong. 

As reported by the Hong Kong Stock Exchange, Evergrande's week began with a 10% drop in its shares. Since the beginning of 2021, the Chinese company has devalued by 85% and its debts are higher than the Gross Domestic Product (GDP) of at least 156 countries in the world.

Translated into figures, Evergrande reached September 20 without the possibility of repaying the debts it has with its creditors, which exceed 300 million dollars; a value equivalent to 2% of the GDP of all China and 100% of South Africa.

However, the problems do not stop there. The company's also reported interest debts of more than 130 million dollars, of which 84 million must be paid on September 23, while the remaining 47 million dollars must be paid before Wednesday 29.

"The stock will continue to fall, because there is still no solution that appears to help the company alleviate its liquidity stress, and there are still many uncertainties about what the company will do in the event of a restructuring," explained Kington Lin, managing director of the Canfield Securities Limited Asset Management Department.

Impact in Latin America

Although the same company assured that "the rumors about the bankruptcy and restructuring of Evergrande that appeared on the Internet recently are totally false," the experts explain that, rumors or not, the company continues to be in the eye of the hurricane due to this situation. However, this is not a 'simple' fall of a multinational, because in the event that it goes bankrupt, a domino effect could begin that would affect not only China, but also the main markets of the world.

Thus, the Latin American market would be one of the most affected, especially after China decided to see in this region an area in which to invest. 

According to Bloomberg, in the last year, Chinese transactions totaled $ 7.7 billion, thus surpassing Europe and North America combined.

Recently, dozens of international companies left Latin America causing the Asian giant to focus on this region, placing unprecedented confidence in foreign investment.

Also read: The 3 Latin American Companies That Have Grown The Most Recently

“That opened a window of once-in-a-lifetime opportunities for China's long-term strategic investors (…) Chinese buyers are finding good assets at fairly convenient prices. And this trend will probably continue in the coming years, "said Alfredo Arahuetes, professor of international economics at the Universidad Pontificia Comillas in Madrid, in statements collected from Bloomberg.

Now, the answer to the question: "what would happen to the China and Latin America negotiations if Evergrande falls?" It is simple: this foreign investment in the region would be significantly affected. With the real estate giant's decline, China will have to worry about keeping its economy afloat, and this may mean less financial injection into international markets, at least while halting or smoothing out the coming economic crisis.

In that context, only the news of the looming real estate chaos has already caused Latin American currencies to fall at least 0.4%. “Today we are facing an episode of risk aversion explained for the most part by that issue. All currencies in the region are depreciating at significant rates and the global dollar is gaining ground, ”said Daniel Velandia, director of Economic Research at Credicorp Capital.

Likewise, Brazil could also be affected due to the slowdown in the construction sector, taking into account that the Latin American country would also see this industry minimized in its territory "due to raw materials", as described by Franklin's investment director Templeton, Luiz Gonzali, in conversation with the specialized portal El CEO .

Finally, the decrease in the purchase of a material used in the real estate sector such as copper would also reflect large losses for Latin American companies, especially in Chile, registering a 3.07% drop in the London Metal Exchange, according to as reported by the Chilean Copper Commission (Cochilco).