Evergrande’s financial woes have spread to global financial markets, while investors are poised for more volatility when Evergrande’s situation unfolds. So, what is Evergrande, why is it in the news, what went wrong and what could happen next?
What is Evergrande?
Evergrande is a property developer giant in China. It owns 1,300 projects in over 280 cities and is China’s largest property developer by sales.
But it does a lot more than just property development. Its business has expanded to include theme parks, electric vehicles, financial services, mineral water, and it even has a soccer team (Guangzhou Evergrande FC).
Why is it in the news?
Evergrande is estimated to have $300 billion in debt and is now struggling to pay its creditors. On September 23, Evergrande had $83.5 million in interest payments due on dollar-denominated bonds. wall street journal informed of Due to which the investors did not get the amount. Evergrande may be declared bankrupt if interest payments are not received within 30 days of the due date.
The rating agency Standard & Poor’s (S&P) has considered the Evergrande default as “probable”. As investors lose faith in the company’s solvency, Evergrande’s share price has fallen 80 percent year-over-year.
As the company scrambles to find funding, construction has put the future of the 1.4 million properties on its projects in doubt. The situation at Evergrande headquarters in Shenzhen has sparked protests. Among the protesters were money owed to Evergrande’s contractors, and those who have paid for a house that could never be delivered now.
But the problem extends far beyond those who owe Evergrande, and it could have far-reaching implications. Property plays a major role in China’s economy. It accounts for about 25 percent of GDP and is also the largest source of household assets (accounting for about 60 percent of household assets). How Evergrande’s plight unfolds thus could have major domestic and global consequences. A disorderly collapse of Evergrande could trigger a downward spiral in China’s property market, derail domestic and global growth, and bring about social unrest as citizens watch their wealth vanish.
what went wrong?
Various regulatory, business and economic factors have created a perfect storm resulting in Evergrande’s financial troubles.
For years, Chinese authorities have enjoyed profits from a booming property market, but have recently become more concerned about the property market’s risks to financial stability. The Chinese Communist Party (CCP) has introduced various regulatory measures over the years designed to curb property prices. It even coined a slogan to discourage property investment: “Home is for living, not for speculation.”
As part of this crackdown on property investment in August 2020, Chinese authorities directly targeted developers with their “three red lines” policy. This policy limited the amount of leverage that developers could have, and developers needed enough cash to cover short-term debt.
These measures greatly affected Evergrande, whose business model relied on aggressive lending to buy land and build housing. Evergrande has been forced to find ways to cut its debt and raise cash to comply with these measures, but in March of this year Evergrande was still not complying with the “three red lines” and “red zones”. It was decided to be in
On top of all that, the pandemic-related lockdown in 2020 effectively shut down the property market for months, slashing property sales and forcing Evergrande to cash in.
What will happen next?
This crisis is not likely to be resolved soon. In addition to the interest immediately owed on it, Evergrande has debts of over several years. It owes $7.6 billion in bond payments for the next year. Managing these debt obligations will be complex and challenging.
Officials in Beijing are likely to step in at some level, but a total bailout is unlikely, according to several analysts. A report by S&P Global Ratings also predicted that a bailout is unlikely, with Evergrande claiming that “not too big to fail” Chinese officials appear to be committed to their policy stance of discouraging asset investment and lending, and ousting Evergrande would undermine that agenda. But Evergrande’s sheer size, profile and interactions with global and domestic financial markets will test their resolve.
This week, the regime’s central bank vowed to protect the interests of homebuyers, signaling it could take steps to cushion the blow from a potential fall.
The Chinese authorities could use their tight grip on the Chinese financial and banking sector for some sort of controlled debt restructuring. Market commentators believe that individuals who have already purchased their homes will be protected, including the possibility of taking unfinished projects to other property developers or even local/regional authorities. Huh.
This News Originally From – The Epoch Times