Will the world suffer as a result of China’s Evergrande crisis?

Evergrande (a Chinese real estate company) is suffering from a deep financial crisis where it has to pay $305 billion to its investors, lenders and suppliers. They are unable to pay this amount which has pushed the property giant on the brink of a collapse. Considering China is an extremely powerful economy, the implications of this collapse will be felt all around the world.

Founded in 1996 by billionaire Xu Jiyain, Evergrande has emerged as one of the biggest residential developers in China. Currently, it has more than 1300+ projects spread over 280 cities in China. Other than properties, the company has also diversified into other areas like electric vehicles, theme parks, food and beverages, bottled water and groceries.

Today, the real estate giant has 200,000+ employees and it indirectly creates 3.8 million jobs. They’ve also invested in a Chinese football team based in Guangzhou. For them, they are building a mammoth training academy worth $185 million and a lotus flower shaped stadium which has a seating capacity of 100,000 worth $1.7 billion.


Why is Evergrande so deep in debt?


The company had borrowed a lot of money (from 128 banks and 121 non-banking institutions) to finance its upcoming projects. They also sold apartments at a low margin with the hope of raising cash and buying land again. Unfortunately, they were unable to execute their plans.


Today, Evergrande has liabilities worth 1.97 trillion yuan which is about 2% of China’s GDP. Understandably, a lot of people criticized the company for taking so many loans from trusts, wealth management products and commercial papers.


On September 14 this year, they declared that they were unable to raise money by selling assets and equity. The announcement came as a huge blow to banks, home buyers, suppliers and investors.


The shares of the company have dropped 80% so far and as many as 100 investors stormed the Evergrande headquarters demanding repayment of loans.


As of now, the Chinese government hasn’t promised anything. Hu Xijin, the editor-in-chief of Global Times, asked Evergrande to not expect support from the government. Instead, he advised them to turn to the market for salvation.


Xijin said that the collapse shouldn’t be compared to the 2008 Lehman Brothers crisis. That’s because Evergrande isn’t a bank but a real estate company.


What is the impact on India?


On Monday, the metal index dived by 7% and major companies like Tata Steel and JSW Steel suffered significantly. That said, the market seemed fairly balanced on Tuesday.


In an interview with The Economic Times, Deven R Choksey (an investment expert) said, “China’s Evergrande failure and reluctance of the Chinese government to bail this particular stock out is something which is creating jitters in the global market. Already, they have been experiencing relatively slow sales of real estate and on the top of it, if a large company fails, that could possibly mean that the amount of commodity related prices in the global market would have its impact on the negative side. The demand situation for a country like India and the globe has not changed. much because infrastructure led spending is also happening in countries like the USA big time and also in the Asian pack. The demand side situation would continue to remain strong, though the pricing scenario would probably remain turbulent in the near term. That is where one would probably see the impact in the stock prices.”


He added that China’s loss could be an advantage for India as some businesses will look at the latter as a more credible alternative.


For sure, the impact of the Evergrande crisis will be felt all across the world. But will it be as bad as the Lehmann Brothers setback? Only time will tell.


References:

1. China's Evergrande crisis explained. A 'Lehman moment' for global markets? (Livemint)

2. Explained: Is the Evergrande crisis China’s Lehman moment? (The Indian Express)

3. China’s Evergrande crisis: Could it spill over to India? Fear of contagion across financial markets jumps (Financial Express)

4. Evergrande or not, India’s outperformance to continue: Deven R Choksey (The Economic Times)