While Hengda Real Estate Group, the main subsidiary of the Chinese Evergrande group, is on the verge of bankruptcy, the financial markets in Korea and abroad are fluctuating strongly. The Korean stock exchange may have avoided shocks from China by shutting down during the long Chuseok vacation, but the Kospi benchmark fell to 3,127.58 on Thursday, down 12.93 percentage points from compared to last Friday. The Korean foreign exchange market was hit the hardest. The exchange rate of the US dollar to the Korean won soared during the day, alongside the possibility that the Fed will start cutting back on asset purchases this year.
Some analysts are worried about the repeat nightmare of the Lehman Brothers collapse, which sparked the 2008 global financial crisis. The Hengda Group’s total debt exceeds $ 300 billion, or 355 trillion won. The company cannot afford to repay the interest on $ 29.3 billion of bonds it issued earlier. Even if Hengda can weather this crisis, his prospects are not bright given the $ 668 million in interest he has to pay by the end of this year and the huge amount of principle he has to pay back. next year.
The Korean government and the Bank of Korea have tried to keep concerns at bay, saying that even if Hengda goes bankrupt, the impact will not be as great as Lehman Brothers. Still, the government is cautiously monitoring developments in China. Koh Seung-beom, chairman of the Financial Services Commission, said he would closely monitor related trends given the risks expected in the process of readjusting global overheated asset markets. A senior central bank official also warned of the repercussions of a possible default by the Hengda group.
Fortunately, few Korean financial companies hold Hengda bonds. Yet they must pay close attention to the crisis for two reasons. First, there is a risk associated with China. The amount of Korean investments in the stock markets of mainland China and Hong Kong has exceeded 18 trillion won ($ 15.3 billion). An increasing number of Chinese companies also face the danger of default since Beijing defended the so-called “orderly withdrawal from the markets” to force companies with excessive debt into bankruptcy. Therefore, even if the liquidity crisis in Hengda does not lead to a global financial crisis, Korean investors should pay close attention to the situation given the critical lack of transparency in China.
Second, there is the possibility of a real estate bubble bursting. Hengda has grown by leaps and bounds after riding the wave of real estate frenzy, but is on the verge of bankruptcy shortly after Beijing began to tighten regulations on home loans. Since Korea is not that different from China in terms of overheated real estate markets, the government and the financial community must find effective ways to prevent a crisis from hitting our economy.