Evergrande, a real estate juggernaut in China, is heading into its darkest days as the company is facing its worst-ever liquidity crunch with debts soaring over $305 billion.
Such a liquidity crisis may have far-reaching consequences as Mark Williams, Chief Asia Economist, Capital Economics, notes that this might be the biggest financial crisis China might witness post their world war economic expansion.
Evergrande was inaugurated as a bottled water company in 1996 by Hui Ka Yan in Guangzhou, China. Today, it is a pioneer in real estate with over 1,300 projects in around 280 cities. It has a diverse portfolio with branches extending into wealth management, FMCG, sports clubs and various sectors.
On September 14, the company vainly attempted to sell off some of its assets and to raise capital by equity. Today, the current liability of Evergrande stands tall at 1.97 trillion yuan, which is approximately 2 per cent of the GDP of China.
One of the prominent reasons for Evergrande's prevailing sad state is the stagnant housing market in China. The housing market boom, which China witnessed for more than three decades, is gradually fading away with more Evergrande projects lining up but failing to sell the apartments.
That coupled with the economic slowdown due to Covid-19 became the recipe for gigabucks of debt. The company sold its apartments at a very low margin in order to raise capital, but to no avail. Subsequently, China's new stringent lending policy on real estate industries brought Evergrande to its knees.
The liquidity crisis of Evergrande may have opened a Pandora's Box of troubles for world economies. According to CNBC, the effect of the Evergrande crisis was witnessed across the stock markets of the World, including the US, the UK, Europe and Germany.
Hang Seng, the stock market index of Hong Kong, hit its 11-month low amid this financial crisis. Similarly, the stock index of the US and Japan also corrected around 2-3 per cent.
This crisis also reached the Indian shores with Indian metal industries such as Tata Steels, Jindal Steels, NALCO and Vedanta taking some serious hits with their stocks plummeting by 3-8 per cent.
According to Mint, Indian Iron industries may suffer due to this financial crisis as they ready themselves to be exported to China.
The Chinese government's stance on the revival of Evergrande seems secondary as the prime focus is on evading the financial crisis imposed by Evergrande. This is evident from WeChat handle of the editor-in-chief of Global Times, a government-backed media house, who cautioned Evergrande to focus on saving themselves rather than looking for relief from the government.
This has worried the investors, the current investors alongside the probable investors, who had or are looking to invest in a plethora of projects in China.
There is a reasonable apprehension among the investors for imminent loss and lock-in of capital in China. Subsequently, the Chinese government, in order to woo foreign investors, has infused roughly 94 billion yuan into the economy through its banks and financial institutes.
Despite the perilous state of Evergrande, many investors such as BlackRock, UBS and HSBC have shown confidence in the company by buying into its debt.
According to Reuters, Evergrande has reached a settlement with its debtees on the interest payment by issuing domestic bonds. Such steps might soothe investors and debtees, who are breathing down on the company's neck, for a while now.
The company and the Chinese government are desperately trying to evade the financial crisis at their respective levels to nip it in its bud and minimise, if not prevent, a likely knock-on effect on the domestic as well as the world economy.
According to analysts, it might take weeks to ascertain the impact of this financial crisis on the Chinese housing market and other markets incidental thereto.
However, it is unlikely that Evergrande's cash crunch will spiral out as much as that of the Lehman Brothers crisis of 2008 as Brad McMillan commented: "Despite the worry, so far this looks like a corporate bankruptcy and not something worse... It's a big one, to be sure, but one that can be handled within the system".
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