Evergrande Crisis: Another 'Lehman'Moment?
$300 billion in debt, $37 billion in interest and maturing debt over the next one year, declining sales , and Beijing's anti-debt policies : A perfect recipe for disaster?
What is the Evergrande Group?
Incorporated in the Cayman Islands and headquartered in Shenzhen, China, the Evergrande Group is now synonymous with an impending global financial crisis. Founded in a period of mass urbanisation in China, Evergrande Group grew to be the second-largest property developer in China, and thus became the face of China’s real estate sector(which contributes over 30 per cent to the Chinese economy), with over 1300 real estate projects in over 280 cities.
It is now one of the world’s most indebted real estate developers with dues worth over $300 billion(approximately 2% of China’s GDP), including bank loans, short-term borrowings, and supplier credit($103 billion). It has interests in Real-estate, Tourism, Sports, automotive, Healthcare, Entertainment, Financial, and Food and Agricultural industries.
What’s the crisis at Evergrande?
As a part of Chinese President Xi Jinping's policy to clamp down on corporate China, over 100 regulations were imposed on businesses that raised huge money via equity funds, borrowings, and IPOs in 2020. One among these laws sets a stringent cap on borrowings of companies.
While many Chinese firms like Ant Group and Tencent took a financial hit because of this cap, Evergrande was one among the worst affected because it had borrowed upwards of $300 billion, which incorporates $19 billion in offshore US dollar-denominated bonds. The corporate has not just borrowed to run its land business, but it also holds the cash that folks invested in its wealth management business.
With such huge debts come colossal interest payments. However, the company may likely default on its debt. Once the shares of Evergrande lost steam thanks to the cap on borrowings, people that had invested in its wealth management business started soliciting for their reimbursement. People who had pre-deposited money to buy flats — that aren't yet constructed — also asked Evergrande to either give them the possession of a flat or return their deposits. Evergrande is currently left with nearly 800 unfinished residential buildings and numerous unpaid suppliers, with over 1,000,000 of those who paid deposits to buy flats.
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As troubles mounted for the corporate, its shares melted significantly. Thus, its market cap right down to $4.9 billion, losing nearly 90 per cent of its value. Hong Kong billionaire Joseph Lau’s company, seriously invested in Evergrande Group, has also hinted at plans to sell all of his stock within the ailing Chinese property developer.
Meanwhile, Evergrande issued a handout warning shareholders of the company and other investors that it’s uncertain whether the Group would successfully implement the measures to ease the liquidity issues and thus were reminded to exercise caution when dealing within the securities of the company.
What Lies Ahead?
The Chinese economy lacks transparency, so only time can tell how banks and other financiers will be suffering from default at Evergrande. Critics have called the Evergrande crisis China’s own ‘Lehman moment’. Some critics even believe that, aside from the roughly $300 billion in debt on its record, the corporate may have additional debt within the sort of various off-balance sheet obligations. However, this may not be a cause for worry since the Chinese economic system is state-owned and thus does not operate to maximise profits. The Chinese state will always be able to bail out entities if necessary. However, any such bailout will have costs because it would require the creation of a fresh supply of cash, which successively will devalue the worth of the Chinese currenc
On the one hand, institutions like HSBC and Stanchart with direct exposure to Evergrande or companies financially linked to Evergrande may experience losses. On the opposite hand, any slowdown within the Chinese economy as the country tries to rebalance its economy far away from the property sector will affect the worldwide supply chain. Metal stocks in India have witnessed a sharp correction. Therefore the move was attributed to fears of a slump in Chinese demand, with Iron ore prices falling below $100 per tonne. Wall Street believes that Chinese growth could drop to as low as 1-2% as it massively rebalances its economy.
Past crackdowns on the ed-tech sector and businessmen like Alibaba founder Jack Ma has not gone well with foreign investors. The exposure of foreign equity investors to assets in China and Hong Kong, which have witnessed a gentle uptrend over the years, have dropped this year. Investors like George Soros believe that the policies of the Chinese government have become even more unpredictable under the rule of President Xi Jinping, and thus advise retail investors to stay vary of china, pointing to the "absence of well-defined regulations".
Insightful and interesting!!
Great going 👍🏽