Looming financial crisis in China as Evergrande misses debt payments
Evergrande Group in China, one of China’s largest real estate developers, collapses into debt defaultânegatively impacting global markets. The company grew aggressively with reckless abandonment and is now the “most indebted real estate developer in the worldWhich owes more than $ 300 billion. In the event of a default, it would be one of the largest in China.
Evergrande is incorporated in the Cayman Islands and is headquartered in Houhai Financial Center in Nanshan District, Shenzhen, Guangdong Province, China. It was founded in 1996 by Xu Jiayin.
Earlier this year, Chinese regulators under Communist Party of China General Secretary Xi Jinping scrambled to tackle financial risk and debt, as China’s debt-to-GDP ratio rose by around 45%. over the past five years. which is now around 270%. They started to apply what was called the three red lines, capping the various debt ratios of a company. This meant problems for highly leveraged companies like Evergrande, which suddenly found themselves unable to borrow.
Evergrande has attempted to recover by hastily liquidating its assets and scaling back operations, but the damage has been done. Unable to pay interest, Evergrande’s stock price has fallen nearly 80% this year, causing its market capitalization to drop: from around $ 40 billion last year to less than $ 4 billion. This forced the company to almost unilaterally halt construction across China, prompting suppliers and employees to demonstrate outside the Evergrande headquarters to demand payment. They also started paying investors with real estate as they struggled to find money.
This decision to pay investors with the property only exacerbates another problem for Evergrande: it owes more 1.6 million apartments to people who have already paid down payments in cash. These people would likely lose their deposits if Evergrande went bankrupt. This, coupled with the potential for unfinished construction, highlights the blatant mismanagement of Evergrande, which prompted the second shareholder of the company to announce that it would sell its entire stake.
The situation with Evergrande has continuously changed over the course of the week as it has negotiated an agreement on a domestic bond payment of $ 35.9 million last Wednesday, but he’s still in a tough spot. Foreign investors are in limbo as a Thursday deadline has been set for an interest payment of $ 83.5 million on a $ 2 billion bond due to mature in March 2022. Evergrande n have not yet provided a statement and are now entering a 30-day grace period. It will default if it goes without payment.
According to Eikon refinitive, an interest payment of $ 47.5 million is due September 29 on a 7-year U.S. dollar-denominated bond maturing in March 2024.
China finds itself weighing down between a potential economic disaster or the reward for reckless corporate behavior. It is important to note that the real estate sector in China accounts for almost a quarter of its GDP, but many believe the Chinese government is unlikely to act.
“Beijing would only be obliged to intervene if there was a large-scale contagion causing the failure of several large developers and posing systemic risks to the economy,” he added. S&P Global Ratings analysts wrote. âThe failure of Evergrande alone would probably not lead to such a scenario. “
So, the general agreement among analysts is that while China will experience economic disruption, it should not cause another global recession. That hasn’t stopped some wondering if this is the Chinese equivalent of Lehman Brothers, whose collapse has become a symbol of the financial crisis of 2007-2008.
Of Evergrande’s 305 billion dollars in debt, some 20 billion Evergrande debt is owed abroad, or less than 10% of its total debt. Lehman Brothers’ offshore exposure was 40% for foreign investors.
âThere seems to be a broad consensus that, while bad, now is not China’s Lehman time,â said economist and Nobel laureate Paul Krugman. in a series of Tweets. “Of course, the broad consensus has been very wrong over the past 15 years. The financial turmoil of 2008-9 was fairly brief, but the economy remained depressed for many years afterwards.”
Although cautious in tone, Krugman adds that the Chinese economy is “wildly unbalanced”.
The People’s Bank of China injected $ 71 billion last week in the banking system allaying fears of imminent contagion from the indebted real estate developer. This is the largest weekly sum from the Chinese Central Bank since January of this year.
The Wall Street Journal said, citing unnamed officials, that authorities have asked local governments to prepare for the fall of Evergrande and distress is already evident among Evergrande’s peers.