Anything but grande

As Hengda Real Estate Group, the main subsidiary of China's Evergrande group, is teetering on the brink of bankruptcy, financial markets in Korea and abroad are fluctuating sharply. The Korean stock market may have avoided the..

As Hengda Real Estate Group, the main subsidiary of China’s Evergrande group, is teetering on the brink of bankruptcy, financial markets in Korea and abroad are fluctuating sharply. The Korean stock market may have avoided the shocks from China thanks to its closure during the long Chuseok holiday, but the benchmark Kospi fell to 3,127.58 Thursday, down 12.93 percentage points from last Friday. Korea’s foreign exchange market was affected more sharply. The U.S. dollar to Korean won exchange rate soared during the day coupled with the possibility of the Fed starting to taper its assets purchases this year.

Some analysts express concern about a repeat of the nightmare of the Lehman Brothers’ collapse, which triggered the 2008 global financial crisis. Hengda Group’s total debt tops $300 billion, or 355 trillion won. The company cannot afford to repay interest on $29.3 billion in bonds it issued earlier. Even if Hengda can overcome this crisis, its prospects are not bright given the $668 million interest it must pay by the end of this year and the enormous amount of the principle it must pay back next year.

The Korean government and Bank of Korea tried to keep concerns at bay, saying that even if Hengda goes bankrupt, the impact will be not as big as Lehman Brothers. Yet the government is cautiously watching the developments in China. Koh Seung-beom, chairman of the Financial Services Commission, said he will closely monitor related trends given the risks expected in the readjustment process of overheated global asset markets. A senior official from the central bank also warned about repercussions of a possible default of Hengda Group.

Fortunately, not many Korean financial companies hold Hengda bonds. Yet they must pay special heed to the crisis for two reasons. First, there is a China risk. The amount of Korean investments in stock markets in 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 championed the so-called “orderly retreat from markets” to force companies with excessive debts to go under. Therefore, even if the liquidity crisis at Hengda does not lead to a global financial crisis, Korean investors must pay close attention to the situation given a critical lack of transparency in China.

Second, there is the possibility of a property bubble bursting. Hengda achieved dazzling growth after riding the tide of real estate frenzy, but is on the edge of bankruptcy shortly after Beijing started to tighten housing loan regulations. As Korea is not so different from China in terms of overheated property markets, the government and financial circles must find effective ways to prevent a crisis from hitting our economy.