The troubles of one of China’s biggest real estate companies have given rise to speculation whether this could be a ‘Lehman Brothers moment’ for the world’s second-largest economy, drawing parallels with the collapse of the US bank in 2008. A spark arose as the housing bubble burst. global financial crisis. Stock markets around the world have already plunged based on news from China, although experts say Evergrande’s situation is unlikely to develop into a full-blown decline in global markets. Here’s what you need to know.
what happened?
Evergrande, China’s second-largest real estate company, has been hit by a crisis for months and the company warned it was facing a liquidity crisis that has left it without money to pay off its debt obligations. Which cumulatively exceeds $300 billion.
The company, which is being described as “the world’s most indebted property developer”, has been downgraded several times by rating agencies and has seen its share price drop nearly 80 per cent this year. The risk that Evergrande is likely to default on upcoming payment obligations was highlighted in September when Chinese officials reportedly told banks not to expect the company to pay interest dues.
The blow to one of the biggest players in its real estate sector would have implications for the broader Chinese economy. While the real estate sector accounts for about 30 percent of China’s GDP, Evergrande’s assets alone account for about 2 percent of China’s GDP. In addition, the company makes up about 4 percent of total asset sales in China, but it cited the slowdown in sales as the primary reason behind its current troubles.
What is Evergrande?
The company was founded in 1996 by Xu Jian in the southern Chinese city of Guangzhou and has become one of the largest real estate developers in China with a focus on residential property construction. It is reported to be behind more than 1,300 projects spread across 280 cities in China.
It has over 1.2 lakh employees and also works with 38 lakh contractors. It is also a Fortune Global 500 group enterprise and is listed in Hong Kong, reporting sales of $110 billion last year.
As the company tried to diversify into real estate, it bought the Guangzhou Evergrande soccer team in 2010, which has now built the largest soccer school in the world, at a cost of $185 million. Evergrande is also building a $1.7 billion lotus-shaped football stadium that will reportedly seat 100,000 people.
It also has a theme park division and runs Evergrande Fairyland.
How did it get here?
Experts say it belonged to the company expansionary moves who have now come to bite. It now operates businesses in categories such as electric vehicles, sports, theme parks, food and beverage, bottled water, groceries, dairy products. Reports said its debt increased when it borrowed heavily for its other projects and sold apartments at low margins in hopes of raising cash quickly.
Part of its problems are also being attributed to actions initiated by China against businesses, including when officials last year brought in regulations to rein in developers’ borrowing costs, a firm’s earnings and assets and capital. The loan limit was fixed at Rs. It said it is trying to reduce its debt through property and equity sales, but has pointed out that it has failed to find buyers.
what is the meaning of this?
Most people who were working at the time will remember the global financial recession of 2007–2008, triggered by massive defaults on loan repayments by US property buyers, which exposed aggressive, and questionable, credit practices on US lenders. .
Evergrande’s situation, however, may not turn into a global crisis as experts say Chinese officials are likely to take steps to manage the fallout.
“Evergrande is such an important real estate developer, and if anything happens it will be a strong sign. I believe there will be some supportive measures on the part of the central government, or even the central bank, who are trying to salvage Evergrande,” Dan Wang, an economist at Hang Seng Bank, was quoted as saying by CNBC.
Evergrande has warned of a “cross default” situation, in which failure to pay dues would have a knock-on effect, eventually leading to a “transition” that could overwhelm the financial system.
As news of Evergrande’s troubles surfaced, stocks in the metals business fell earlier, with reports of declining industrial metals and ore prices around the world. In India, the BSE Metals index was down 6.8 per cent on September 20, its lowest point in months.
Markets around the world also rallied as the S&P 500 lost 1.7 percent, its biggest drop since May.
China is the world’s largest user of building materials and the fall in property activity in the country will have implications for the global steel and building materials industry, experts say, adding that the fall in steel and iron ore prices will drive companies in the sector to earn money. will be affected. which are located in India.
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