What is the Evergrande crisis and how might it impact the global economy?
The Chinese real estate giant Evergrande is thought to be on the brink of collapse with debts of $300 billion, leaving investors fearing for the global consequences.
Chinese real estate giant Evergrande is thought to be on the brink of collapse as it struggles to make interest payments worth around $84 million on offshore bonds this Thursday.
Global stock markets have been watching closely as the world’s most indebted real estate developer faces a key test in its ongoing viability after appearing to lose vital support from the Chinese government. In recent days it has been forced to repay investors with property because it lacks the cash solvency to meet its existing liabilities.
The company, formerly known as the Hengda Group, was founded in Guangzhou in 1996 and has grown to encompass a broad range of services. Evergrande Real Estate, the core business, currently owns around 1,300 development project across China and founder Hui Ka Yan has a personal fortune of around $10.6 billion.
What has happened to Evergrande?
Evergrande’s rapid growth in the past 25 years has been built on incredibly aggressively expansion which has seen it borrow more than $300 billion. In the past that level of debt has been aided by loose restrictions from the Chinese government but last year Beijing introduced new rules designed to curb the amount owed by developers.
To help adhere to the stricter regulations Evergrande has been forced to offload some major properties at a considerable discount, and yet is still struggling to meet the interest payments. The company’s share prices has fallen by around 85% since the start of the year and if it were to go out of business entirely it could have serious global ramifications.
Those who bought property in sites that Evergrande was developing would lose their money, while the construction and design companies doing business with Evergrande also risk serious losses if the company is not able to cover costs.
What is the global impact of the Evergrande crisis?
The scale of the impact in China and globally will likely be decided by the lengths that the Chinese government is willing to go to prevent broader financial contagion. Investors are concerned that allowing the company to fail could have catastrophic effects for stockholders and bondholders.
Jimmy Chang, chief investment officer at Rockefeller Global Family Office, said of Evergrande: “It has $300 billion in outstanding debt. There is a contagion issue if China Evergrande is not resolved. I think it will end up having some deep-pocketed state-owned enterprises to take over.”
China’s banking system is largely controlled by the government meaning that it is Beijing who could well have the final say on the global impact of the situation. Considering that the domestic liability is far greater, it appears likely that Chinese authorities will act to ensure that Evergrande is not allowed to spark another major financial crisis.
However Rick Rieder, chief investment officer of global fixed income at BlackRock, admits that at this stage it is difficult to predict how the Chinese government will react: “The hard thing about particularly understanding China is that it is an opaque system and oftentimes you don’t have answers until you get answers.”