Evergrande Debt Default: A Big Financial Crisis For The World

Evergrande Debt Default: A Big Financial Crisis For The World

On Wednesday concerns mounted regarding deepening liquidity in the Chinese Real Estate sector before the deadline broke China Evergrande Group for a coupon payment of an offshore bond. Let us look deeply into the matter of Evergrande debt default.

What Is The Evergrande Debt Default?

Evergrande Group is presently the most indebted developer in the world which has been shifting from deadlines to deadlines in the recent days as it struggles with over $300 billion in liabilities, and among them, $19 billion are international bonds. You may wonder, who owns Evergrande debt. It is a company by Hui Ka Yan

Beijing has been urging firms owned by the government and the property developers that are backed up by the state to buy some assets of Evergrande and try to control the Evergrande debt default. Despite this huge debt woe and Evergrande default date, the company is moving forward with their business plan of their Electric Vehicle (EV) unit which is the Evergrande Automotive. China Evergrande New Energy Vehicle Group Ltd strategizes to sell  HK$500 million ($64 million) worth of Evergrande stocks to fund the production of the latest energy cars. The unit has plans to sell 174.83 million latest shares, or 1.76% of the extended share capital, at HK$2.86 for every share in a filing to a Hong Kong stock exchange.

The Evergrande Crisis

The world is still struggling to understand what will eventually happen to the Evergrande conglomerate and its huge mountain of debts. The debt crisis of this property developer is a big test for Beijing. According to some analysts, this crisis can turn out to be like Lehman Brothers that took place in the U.S in 2008. There may not be any Evergrande effect on the U.S. Economy but it may hamper the Indian economy to some extent. Let us see how this crisis actually happened.

How Did Evergrande Run Into Trouble?

Evergrande is among the largest real estate developers in China. This company is presently a part of Global 500 which implies that it is among the biggest businesses in the world by revenue. 

Beyond housing, this group has several other investments as well like in electric vehicles, theme parks, and sports. It is even the owner of a food and beverage business, dairy, bottled water, grocery, etc. in 2010, this company purchased a soccer team, which is now termed as Guangzhou Evergrande. Since then the team has created the world’s biggest soccer school. 

Now coming to the fact, how it ran into trouble. In present years, the debt of this company increased to a great extent as it did many borrowings to finance its various investments. This group has been defamed for being the most indebted developer of China with over $300 billion liabilities. In the last few weeks, it warned its investors regarding the issue of cash flow, that there can be an Evergrande debt default taking place if they cannot raise the money quickly. 

This warning turned into reality last month when the company disclosed in a stock exchange filing that it was facing trouble finding buyers for some of its assets. 

In some ways, the aggressive ambitions of the company are what resulted in hot water, as per the experts. According to Mattie Bekink, China director of the Economist Intelligence Unit.

“The group strayed far from its core business, which is part of how it got into this mess."

According to an analyst of Goldman Sachs,

"The structure of the company has also made it difficult to ascertain a more precise picture of [its] recovery. The complexity of Evergrande Group, and the lack of sufficient information on the company's assets and liabilities."

Bekins further said,

"The story of Evergrande is the story of the deep [and] structural challenges to China's economy related to debt."

This isn’t a new issue completely. Last year, a stack of Chinese state-owned entities defaulted on their loans, rearing fears about China’s reliance on debt-fueled investments to support growth. In a current note, Mark Williams, Capital Economics’ chief Asia economist, asserted that – Evergrande’s collapse would be the biggest test that China’s financial system has faced in years.

He further added that,

"The root of Evergrande's troubles — and those of other highly-leveraged developers — is that residential property demand in China is entering an era of sustained decline. Evergrande's ongoing collapse has focused attention on the impact a wave of property developer defaults would have on China's growth."

The Investor’s Reactions

Evergrande’s issues divided onto the streets in September 2021 when protests jumped up at its headquarters which is located in Shenzhen. Footage from Reuters portrayed scores of demonstrators at the site last week, greeting someone detected to be a company representative.

But shareholders have been cautious for months: The stock has dropped almost 85% of its value in 2021.

What Can Happen Next?

Let us see what could happen on the Evergrande debt default finally. The Chinese government seems to be starting to interfere. In the last few days, the People’s Bank of China has inserted some cash into the financial system, to support the settling of nerves. In September 2021 alone, it added 100 billion yuan (approximately $15.5 billion), asserting it was to keep liquidity running.

In a statement that week, the central bank also pledged to –

"maintain the healthy development of the real estate market, and safeguard the legitimate rights and interests of housing consumers."

“It twofold down on that message in a meeting that was jointly conducted with regulators, where business heads focused on the need to not use "real estate as a short-term [tool for] economic stimulus."

Officials have also asked the financial sector to emphasize on stabilizing housing and land values, by adding that institutions should operate with  “Local governments to jointly maintain the steady and healthy development of the real estate market.”

Authorities are clearly observing closely while trying to project calm. In September, a spokesperson for China’s National Bureau of Statistics, Fu Linghui, recognized the challenges of some big real estate entities, as per the state media.

Without naming the company directly, Fu asserted that the real estate market in China had stayed stable this year but the impact of some current events on the improvement of the whole industry requires to be observed. So the final question lies, what happens if Evergrande defaults. Then this company has to file for bankruptcy and surrender.

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Niccolo Romano

Niccolo Romano is an Italian writer who holds expertise in business, and startup related articles. He has a love for business news and is best in his niche.

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