Evergrande is one of the biggest real estate developers in China, with more than 1,300 projects in over 280 cities across the mainland. Its total liability stands at 1.97 trillion yuan, accounting for 2 percent of China's GDP. Currently, it is scrambling to repay $305 billion to lenders, suppliers and investors due to a cash crunch.
 |
| China's Evergrande's Crisis: All You Need To Know About It |
Why In News?
News that real-estate giant Evergrande Group—once China’s top property developer, now Earth’s most heavily indebted—has reached the brink of collapse is causing what you might call “market jitters” today on 20th Sep 2021.
Evergrande reportedly told banks that it won’t be able to meet the interest payments due today on its loans. Global sentiment has been rattled by Evergrande, which has some $300 billion in liabilities, including debt obligations due this week—starting today—that it can’t pay.
What is Evergrande?
Founded in Guangzhou in 1996, Evergrande, one of China's biggest developers, is on the brink of collapse as it wallows in debts of more than $300 billion. The company made its name in building residential property. Currently, it owns more than 1,300 projects in over 280 cities across China, according to its corporate website.
It later diversified into electric vehicles, sports and theme parks, food and beverage business, bottled water, groceries, and dairy products. The company employs around 200,000 people and generates more than 3.8 million jobs each year
In 2010, the company bought the Guangzhou Evergrande soccer team, which has built the world's biggest soccer school at a cost of $185 million. At present, the company is working on building a lotus-flower shaped soccer stadium at an investment of $1.7 billion with a seating capacity for 100,000.
A Fortune Global 500 group enterprise, Evergrande is listed in Hong Kong. The real estate giant reported $110 billion in sales last year.
The once-mighty Evergrande Group has long been the face of Chinese real estate, surfing a decades-long property boom to expand into more than 280 Chinese cities as it peddled home-ownership dreams.
But it is now smothered by a $305 billion liabilities burden that has crushed its credit rating, share prices and reputation among a once-adoring public. Some are calling this “China’s Lehman Brothers moment,” believing it’s unfolding much like the scenario in which Lehman Brothers declared bankruptcy during America’s housing crisis, setting in motion the 2008 global financial crisis.
Because the total debt that Evergrande has amassed ($305 billion, literally 2% of China’s GDP) suggests it may be too big to fail, and could have a ripple effect on the global economy if it did
Background of Evergrande Crisis
There is enough empty property in China to house more than 90 million people. To put that into perspective, any one of five G7 countries — France, Germany, Italy, the UK or Canada — could fit its entire population into those empty Chinese apartments with room to spare.
China has been trying to walk a tightrope. Property prices have risen considerably in the past 15–20 years and it has made housing unaffordable for millions of people — something that isn’t very palatable to the Communist Party of China (CPC).
But the thing is — This has largely been their own doing. For years now, the Chinese government has facilitated easy financing options for the likes of Evergrande —one of China’s largest real estate group. These companies in turn have relied on cheap debt to lap up land parcels across the country. With a fixed land stock, this incredible buying spree has created an artificial scarcity of sorts. The scarcity thus precipitated, has indirectly pushed land prices higher. And the increase in land prices has fed into the boom in property prices.
So, Now realizing this the govt has forced an audit to see whether thee companies breached the credit limits set by them. And that's what happened with Evergrande. They have liabilities to the tune of $305 Billion, making them ineligible to borrow anymore.
One estimate says as much as two-thirds of its liabilities could be cash that people put down for homes that have not been finished yet. Evergrande responded to Beijing’s clampdown by selling properties at serious discounts to shore up its bottom line. Despite that fire sale, the company still struggled to make interest payments on its enormous debts, leaving it teetering on default.
Who are at risk?
Banks, suppliers, home buyers and investors are all likely to feel the heat of a bankruptcy if it happens.
The company said its situation may lead to “cross default” where one default triggers obligations in others.
In 2018, China’s central bank had warned that companies like Evergrande might pose systemic risks to the country’s financial system. More than 128 banks and 121 non-banking institutions are exposed to Evergrande liabilities, according to a letter from the company to the government last year.
According to JPMorgan estimates, China Minsheng Bank has the highest exposure to Evergrande.
Evergrande also holds 4 percent of Chinese real estate high-yields in the dollar bond market, DBS has estimated. Defaults would trigger sell-offs in the high-yield credit market as well.
Investors have started to feel the heat, with the company’s shares plummeting nearly 80 percent so far this year. Trading of its bonds has been halted several times by Chinese stock exchanges in the past weeks.
Not as bad as Lehman?
Meanwhile, the Global Times, a state-backed Chinese tabloid, said the company should not depend on a government bailout for its defaults. In a social media post, Hu Xijin, editor-in-chief of Global Times, said Evergrande should turn to the market for salvation, not the government. Unlike the collapse of Lehman Brothers, Evergrande's potential bankruptcy is unlikely to trigger a systemic financial storm, he said, adding the company was a real estate business and not a bank.
Conclusion:
A total collapse of the Evergrande group won’t bode well for anyone. There are suppliers waiting for payments. There are banks hoping to see their loans repaid. And there are homebuyers praying that their unfinished home sees the light of day. If Evergrande were to go bankrupt, the implications of this won’t just be limited to the real estate group — It will spread far and wide. It will also send shockwaves across the entire industry as one in five of China’s biggest real estate developers have also breached similar limits. Real estate prices could come crashing down as developers try to get rid of unsold homes.
More importantly, it could be problematic to the Chinese people. Nearly 70% of Chinese household wealth is tied up in real estate and a sudden downturn in prices could mean erosion of wealth — the kind that's never been seen before. So by all accounts, this is problematic, not just for big developers but also for the population at large.
However, there’s also growing belief that the Communist Party will engineer a “soft landing.” They have the resources and the political willpower to mitigate a catastrophe and maybe that’s precisely what they’ll do. Also bear in mind, unlike the US, the Chinese influence doesn’t extend as far. A real estate crisis in China will most certainly impact some nations and may even affect India, but it’s unlikely to be as damaging as the 2008 financial crisis.
