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What has happened?
- Evergrande is scrambling to repay $305 billion to lenders, suppliers and investors due to a cash crunch.
- The Chinese property giant is on the brink of collapse and this could have implications beyond China’s borders, warn analysts.
- “Evergrande’s collapse would be the biggest test that China’s financial system has faced in years,” Mark Williams, Chief Asia Economist at Capital Economics, told.
What is Evergrande?
- Founded in Guangzhou in 1996 by Chinese billionaire Xu Jiayin, Evergrande is one of the biggest real estate developers in China.
- The company made its name in building residential property.
- Currently, it owns more than 1,300 projects in over 280 cities across China, according to its corporate website.
- It later diversified into electric vehicles, sports and theme parks, food and beverage business, bottled water, groceries, and dairy products.
- The company employs around 200,000 people and generates more than 8 million jobs each year, the website says.
- In 2010, the company bought the Guangzhou Evergrande soccer team, which has built the world’s biggest soccer school at a cost of $185 million.
- At present, the company is working on building a lotus-flower shaped soccer stadium at an investment of $1.7 billion with a seating capacity for 100,000.
- A Fortune Global 500 group enterprise, Evergrande is listed in Hong Kong.
- The real estate giant reported $110 billion in sales last year.
What is the problem now?
- Evergrande’s debts rose when the company borrowed to finance its other projects.
- It also sold apartments at a faster rate even with low margins with the hope to raise cash and buy land again.
- t year in September, a leaked letter allegedly from the company, seeking support from the government for a listing plan, sparked concerns among investors.
- The company denied having written such a letter.
- On the request of Guangfa Bank, a Chinese court froze a bank deposit worth $20 million held by the firm in July.
Debt value?
- Evergrande’s interest-bearing debt stood at 571.8 billion yuan ($89 billion) at the end of June.
- It was 716.5 billion yuan at the end of 2020.
- Its total liability stood at 1.97 trillion yuan, accounting for about 2% of the country’s GDP.
- The company has been criticised for borrowing from trusts, wealth management products and commercial papers.
- It stepped up deleveraging efforts last year after regulators introduced caps and hoped to meet all the requirements by the end of next year.
- However, on September 14, the company said its plans to raise money through asset and equity sale failed to make any progress.
Who are at risk?
- Banks, suppliers, home buyers and investors are all likely to feel the heat of a bankruptcy if it happens.
- The company said its situation may lead to “cross default” where one default triggers obligations in others.
- In 2018, China’s central bank had warned that companies like Evergrande might pose systemic risks to the country’s financial system.
- More than 128 banks and 121 non-banking institutions are exposed to Evergrande liabilities.
- According to JPMorgan estimates, China Minsheng Bank has the highest exposure to Evergrande.
- Evergrande also holds 4% of Chinese real estate high-yields in the dollar bond market.
- Defaults would trigger sell-offs in the high-yield credit market as well.
- Investors have started to feel the heat, with the company’s shares plummeting nearly
- 80% so far this year.
- Trading of its bonds has been halted several times by Chinese stock exchanges in the past weeks.
- According to a Reuters report, 100 investors descended at Evergrande’s headquarters in Shenzhen on September 13,
- Demanding repayment of loans on overdue financial products.
Global impact
- Meanwhile, the Global Times, a state-backed Chinese tabloid, said the company should not depend on a government bailout for its defaults.
- In a social media post, Hu Xijin, editor-in-chief of Global Times, said Evergrande should turn to the market for salvation, not the government.
- Unlike the collapse of Lehman Brothers, Evergrande’s potential bankruptcy is unlikely to trigger a systemic financial storm, he said,
- Adding the company was a real estate business and not a bank.
Q) Which of the following characterize the early stages of a financial crisis?
- Excessive euphoria about the future price of certain assets
- Excessive pessimism about future asset prices
- Stable house prices
- Stagnating share prices
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