During the week of the 20th September, there was a massive sell-off in the stock market worldwide after Evergrande, the second largest Chinese property developer, was exposed to be at risk of collapse.
This belief in Evergrande’s collapse came from the high risk of a debt default to the creditors, which accumulated from its massive loans over the past years. According to Financial Times, Evergrande is the world’s most indebted real-estate developer as it has accumulated 300 billion US dollars in debt. The tighter regulation and the crackdown in the property sector to prevent house price speculation by the Chinese government has made it even harder for Evergrande to raise the funds to repay its debt. This is because the new regulation made it more difficult for the company to borrow more money to complete its approximately 800 unfinished projects. While this prevention can restrict the company from accumulating more debt, it seems to worsen its income, which has constantly depleted from the rise in housing prices in China and the impact of the pandemic on the global economy. This is because it cannot sell the unfinished projects in the market to increase its income which can be used to repay its debt.
The earliest debt repayment deadline of Evergrande is the 83.5 million US dollar interest repayment of 2 billion US dollar offshore bonds to the bondholders. The due date was on 23 September 2021. Currently, the deadline has already passed, and there is still no announcement from the company regarding how it will repay this debt. According to CNN, Evergrande will be declared as officially defaulting on this debt if it does not repay its debt or make a new agreement with its lenders within 30 days after the due date. This failure to repay the debt before the deadline also caused huge concern to the company’s major investors. As can be seen, the Chinese Estates, Evergrande’s second-largest shareholder, has already sold 31.7 million US dollars worth of Evergrande shares due to the looming risk of default.
According to CNN, the update from the company so far was only the announcement of the new agreement with the yuan bondholders on 22 September 2021. This news caused the Evergrande stock to rebound back at 32% from its previous price in the Hong Kong stock market on Thursday 23 of September. However, this does not guarantee that Evergrande will not default on its debt in the future. This is because the company does not currently have a clear plan to restructure its debt model, apart from warning its creditors and investors about the risk of company defaults in the past few weeks.
Currently, some economic analysts believe that the Evergrande might be “too big to fail,” which can lead the Chinese government to bail out the company. The reason behind this is that Evergrande is considered as a company in the Global 500. This means the company is one of the biggest businesses by revenue in the world. As can be seen, over 1300 property development projects across China and one of the Chinese Football Club, Guangzhou FC, are examples of assets owned by the Evergrande. Goldman Sachs data also indicates that company assets are equal to 2% of China GDP.
However, due to the current crackdown of the Chinese government that aims to decrease the excessive borrowing issues in the Chinese property market, it is likely that they will not bail out Evergrande. This is because bailing out the Evergrande can encourage other companies to have risky loans. Consequently, there is a higher chance that the Chinese government will step in to help the Evergrande restructure their model to prevent the impact of their collapse on the Chinese economy.
If the company collapses due to the default, it cannot fulfil many of its partners’ business obligations or involve individuals and organizations. This can cause negative knock-on impacts to many parties, triggering a crisis in the Chinese economy.
National and foreign banks seem to be the parties that the collapse will most hit. As can be seen, national and foreign banks are one of the major lenders of the Evergrande. If the company cannot repay their debt, banks cannot get its loan and interest rates back. This can disrupt the cash flow of the banks, which can cause spillover effects across the global economy. The rise of unemployment in China can also be increased if Evergrande collapses because the company indirectly creates around 3.8 million jobs every year, together with having 200,000 employees under its wing. As the company’s shares and bonds are listed in indexes across Asian countries, many financial institutions and investors across the globe will face massive financial losses if the collapse occurs. Some analysts believe that these can lead to snowball effects that can trigger a global financial crisis like the collapse of Lehman Brothers in 2008.
Currently, there is a high possibility that the collapse of Evergrande could cause a global financial crisis. The crash of the global stock market due to the default looming could be a signal. However, this issue might be prevented if the company manages to restructure its debt. The Chinese government will also be a possible key player to indicate the future of Evergrande and the global economy. This is because they are the highest authority in China which can direct the company’s future through their policy and regulations. The results of this situation remain to be seen, but one can only hope that the circumstances will be resolved shortly and without a global economic collapse.
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