Possible default by Chinese company Evergrande could impact Brazilian agriculture

The announcement, last Monday (20/09), by the giant Evergrande, one of the largest business conglomerates in China, about the difficulties in honoring its payments, caused stock markets around the world to plummet. In addition to being one of the largest developers, they also have important investments in the food, beverage and electric car sectors. Added to this, they own the biggest football team in China, Guangzhou, current champion of the Chinese League and the biggest winner of the national championship.

The company is so important that it is estimated that it is responsible for around 2% of China's current GDP. The fact is that they recently took out a loan worth US$300 billion, the majority of which was borrowed via the financial system, justifying investments in their real estate sector. This movement was already being widely questioned and monitored by analysts. There are doubts about the potential contagion this would have on China's financial system itself and due to the size of the company in the global financial system.

As the ancients say, to understand the present and the future we have to look at the past. For example, in 2008 the case of Lehman Brothers was the harbinger of the great financial crisis that resulted in major consequences. The amount involved at the time was slightly higher than today. But, for analysts, this turns on a warning light in the financial market, mainly due to the effects that this will cause, firstly, on the level of internal activity in China and, secondly, on the possibility of the Chinese financial system and, consequently, the international financial system.

This will certainly impact Brazilian agriculture in several ways. Firstly, an eventual default by Evergrande will affect domestic economic activity in China. And this will reduce the demand for Brazilian commodities. The market has already been witnessing a decrease in Chinese appetite, which had already been restricting its activity and reducing imports with a view to guaranteeing certain environmental standards for the Winter Olympics that will take place in Beijing, only in February 2022.

Many analysts had already been warning that China was stockpiling commodities, especially iron ore, steel and agricultural products, already with a view to lowering demand for imports a little during the beginning of next year. This Evergrande crisis further exacerbates this decrease in Chinese voracity for commodities in general and of course impacting the level of demand for Brazilian agribusiness.

A possible contagion to the financial system in China and consequently to the international financial system could lead to a new international crisis like the one we experienced with the bankruptcy of Lehman Brothers in 2008. This crisis would have a very strong impact on the level of demand, at least least in Brazilian commodities.

In addition to the direct and indirect effects that a financial crisis can cause in terms of credit constraints, bankruptcies, unemployment and reputation for attracting investment, there are factors influenced by cultural issues involving China and East Asia. These places traditionally consume a wider range of foods than is consumed in western countries, that is, the possibility of finding substitutes for Brazilian food products in the local market is wider in Asia than in other countries. Therefore, their food palette is easier to adapt. There is a demand shock, as can happen in the case of Evergrande.

Many analysts have been questioning whether Evergrande would be such a serious case and whether the Chinese government would intervene to save the conglomerate. One cannot forget that the Chinese government has already been conducting a policy of increasing regulation of these large conglomerates and reducing their economic and political influence. It is not yet clear whether or not the government will save Evergrande. Most analysts imagine that they will help workers estimated at more than 125 employees.

At this time, maybe you will get some kind of help for the workers, but not for the company itself. It is very likely that for internal political reasons, China will let Evergrande fail, make the necessary adjustment in its real estate sector, which has not been done elsewhere, and take the lead in this regard and increase the control of the Chinese Communist Party over certain sectors of the economy. Which were still in the hands of large conglomerates.

It is always important to remember that the Chinese have plans to launch their digital currency during the 2022 Winter Olympics. This could be an opportunity for China to provide direct financial assistance to its population without the interference of the financial market, that is, it is It is possible that China will abandon the financial market to its fate.

How is the exchange?

With regard to the exchange rate, it is important to remember that, most likely, with the launch of the Chinese digital currency, the devaluation of the yuan will be held back a little, which has lost a lot of value against the dollar in recent days with the news of Evergrande. This has a direct impact on Brazilian exports because with the weaker yuan, the Brazilian product is more expensive for the Chinese consumer. Decreasing even more a demand that has already been decreasing in recent months.

For Brazilian agribusiness producers and operators, the most important thing at this moment is caution. It is important to have a plan on the table. It is important to have a financial strategy to protect yourself against possible turbulence and to start thinking about alternative markets for your products, in case Chinese demand does not meet the purchase of Brazilian production, as it has been doing in recent years. A hedging and insurance strategy at this point seems fundamental to us.