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Evergrande is a name you’ve probably never seen before, but now it’s on news reports around the world. No, it’s not the ship that got stuck in the Suez Canal –– but rather a Chinese real estate giant. After years of dangerous borrowing, the company announced last week that it may default on its debt.
That’s a big deal because, with over $ 300 billion in debt, Evergrande is the world’s most heavily indebted real estate company. For comparison: Russia’s national debt in 2020 was $ 257 billion.
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But Evergrande isn’t just making headlines because of these alarming statistics. If the company goes bankrupt, it could have a dramatic impact on the entire Chinese economy. Since China is an important trading partner for most of the world’s countries, the economic problems within the country could be widespread.
Here’s what you need to know.
What is Evergrande’s problem?
Evergrande, which had sales of $ 77 billion last year, has two repayments to make in the coming weeks. First, according to CNBC, an interest payment of $ 83 million is due on Thursday, and another repayment on another bond is due on September 29.
On September 14th, Evergrande announced to its investors that it may not be able to meet these obligations.
“In September, real estate companies in China tend to see higher contract sales of property,” a letter said to investors before adding that Evergrande “expects a significant sustained decline in contract sales in September, leading to a continued deterioration in cash collections the group, which in turn would put the cash flow and liquidity of the group under enormous pressure. “
As a result, the company said it may not be able to meet its upcoming financial commitments.
Evergrande owns assets in many sectors, not just real estate. It has an electric vehicle company, soccer team, and bottled water business, among other things. The company sold some assets related to these investments, but not enough to pay for debt payments.
Evergrande was asked to comment but did not respond. In a statement to employees, the company’s chairman, Hui Ka Yuan, is said to have said: “I firmly believe that with your concerted effort and hard work, Energrande will get out of its darkest moment, the construction work in full as soon as possible possible to resume and achieve the ultimate goal will be to deliver the promised real estate projects. “
Will the government help?
Nobody is sure yet, but there are some signs that the state will not save Evergrande.
First up are the recent comments from the editor-in-chief of the Global Times, a state-controlled publication that is often viewed as the mouthpiece of the Chinese Communist Party. “Once the problem explodes, the company cannot have the chance of being ‘too big to fail’,” he wrote on WeChat. “You must have the ability to save yourself.”
“Blind expansion, reckless financial manipulation, and high leverage are all adventures that require gentle winds and luck,” he added. “Evergrande tightened the elastic too tight.”
Aware of the indebtedness of real estate companies, China last year developed a system to contain dangerous borrowing, the so-called “three red lines”, under which property developers have been liable for asset ratios below 70 since August last year %, a net gearing ratio of less than 100% and a cash-to-short-term debt ratio of at least one. If they fail on the wrong side of these lines, companies like Evergrande would be prevented from borrowing more money.
The message to the real estate developers was clear: It is up to you to act together.
Still, there are signs that China’s authorities will give Evergrande some air to breathe. Instead of buying its debt, authorities have approved an Evergrande debt restructuring proposal, Bloomberg reports, that would include extending payment deadlines.
Damaged homebuyers, vendors and employees gathered at Evergrande offices across China last week.
Noel Celis / Getty
Is this like China’s version of the global financial crisis?
Yes and no. (Mostly no.)
It is in the sense that the aftershocks of an Evergrande collapse with its massive debt would be felt in industries around the world. However, analysts don’t expect the impact to be as devastating as the global financial crisis around 2008 that developed when subprime mortgage debt was repackaged and sold to financial institutions in many countries. Most (but not all) of Evergrande’s debts are held by creditors in China.
“We believe that Beijing would only be forced to intervene if widespread contagion caused several major developers to fail and pose systemic risks to the economy,” said a September 20 S&P report. “A failure at Evergrande alone would be unlikely to lead to such a scenario.”
However, destabilized real estate markets are usually associated with subdued consumer spending. If Evergrande collapses, Chinese demand for international products, raw materials, and services could potentially decline. That would affect markets everywhere as China is a major trading partner for over 100 countries around the world. U.S. exports to China totaled $ 124 billion in 2020.
What has been the fallout so far?
The reaction in China was violent. Evergrande has committed to building 1.3 million to 1.6 million homes, according to various estimates, and applied for employee loans earlier this year, the New York Times reported, which now appears unlikely to repay. Protests have broken out in front of Evergrande’s offices across China and at its headquarters in Shenzen. Among other things, employees, suppliers and customers who paid for houses still to be built demonstrated.
Although the company is not yet officially insolvent, the world markets have armed themselves. The S&P Index, Nasdaq, Japanese Nikkei 225, and Australian ASX are among the many markets that have fallen in the last 24 hours before possible Evergrande issues.