Evergrande crisis causing US$10 billion in pension, investor losses, says German researcher

November 18, 2021

BERLIN -- The Evergrande default and the China real estate crisis are currently causing around US$10 billion in losses at the 10 largest pension and investment funds specialising in Asia, with the largest Evergrande bond exposure of around US$1.2 billion, according to a new DMSA study just published.

Of these losses, US$7 billion has already been incurred in real terms, and a further US$2 billion will be realised when insolvency is filed, the report by the German researcher says,adding that a further US$158 billion in losses on Evergrande from CDS investments by international investors is expected.

A study analysing the top 10 Asia-focussed pension and mutual funds with the largest exposure to Evergrande bonds shows that Evergrande and general China exposure has led to losses of up to 21% this year in all 10 funds studied - and that across all 10 funds combined, losses total $7 billion.

Current Evergrande bond prices are about a quarter per dollar (about 25% of 100 nominal) and, based on Fitch redemption rates, will fall to 5% per $100 upon insolvency. Therefore, a further correction of 6% or $2 billion is expected.

"If Evergrande will be bankrupt, the above funds would lose $9 billion in total year-to-date. This does not take into account real estate companies that are still well valued and which could also be on the verge of insolvency. The funds' losses then exceed the $10 billion mark," says DMSA senior analyst, Marco Metzler.

It also shows that with only $1.2 billion of reported official Evergrande bond exposure, the losses are significantly higher than the nominal bond exposure by a factor of 10.

"The difference can only be explained by possible additional investments in other bonds from Chinese real estate developers and credit default swaps (CDS)," smays Metzler.

According to a research report by investment bank, Goldman Sachs, the market's CDS exposure to Evergrande is said to be around $158 billion, he adds.

"This shows the extent of the spill-over effects of the Evergrande bankruptcy. In addition to the $23.7 billion in bonds, another $158 billion would then be lost."

Valued at $55 trillion, the Chinese real estate market is twice the size of that in the United States. It generates compared to 10% to 20 % in other nations, and has been called the most important sector of the global economy.

But with the mountain of debt from real estate developers like Evergrande and funds overweight in real estate bonds, many are now experiencing dramatic losses, the report says.

www.dmsa-agentur.de (ATI).