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Explained: What Is Happening With Evergrande?

The company is now facing a default issue and has been struggling to raise funds to pay its lenders, suppliers and investors. The total estimated liabilities of the company stand at $305 billion which is 2 per cent of China's GDP.

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On Monday, the domestic and global markets witnessed a big crack. The Sensex closed with a downfall of 525 points. The Nifty and the Bank Nifty also dipped 188 points and 666 points respectively. Similar scenes were witnessed in the European market as it slipped 2 per cent. All this is being attributed to China's second biggest real estate developer Evergrande which is on the verge of bankruptcy.

A Brief of Evergrande

Founded in 1996, Evergrande is China's second biggest real estate developer owning more than 1300 projects in over 280 cities across China. The company has diversified into areas like electric vehicles, sports and theme parks, food and beverage business, bottled water, groceries and dairy products. It is listed in Hong Kong.  

The company employs around 200,000 people and generates more than 3.8 million jobs each year. At present, it is working on building a lotus-flower shaped soccer stadium at an investment of $1.7 billion with a seating capacity for 100,000. It reported $110 billion in sales last year. 

What is the issue now?

The company is now facing a default issue and has been struggling to raise funds to pay its lenders, suppliers and investors. The total estimated liabilities of the company stand at $305 billion which is 2 per cent of China's GDP.

The company in the past has been criticised for borrowing from trusts, wealth management products and commercial papers. On September 14th, the company said that it plans to raise money through asset and equity sale but failed to make any progress. 

 Evergrande is due to pay $83.5 million interest on 23rd September for its March 2022 bond. It has another $47.5 million interest payment due on 29th September for March 2024 notes. Both bonds would default if Evergrande fails to settle the interest within 30 days of the scheduled payment dates.

Will the Chinese Government Bailout?

In 2018, China's Central Bank had warned that companies like Evergrande may pose systemic risks to country's financial systems and now, given the magnitude of debt, there may be a situation of cross default which means that Evergrande's default can trigger default in other associated sectors as well. More than 128 banks and 121 non-banking institutions are exposed to Evergrande liabilities. 

In a letter to staff on Tuesday, Evergrande Group's Chairman, Hui Ka Yan said, "the company will walk out of its darkest moment."

State-backed Chinese tabloid, the Global Times said that the company should not depend on a government bailout for its defaults and rather should turn to the market for salvation.

"The repercussions from Evergrande’s prospective collapse will likely contribute to China’s ongoing economic deceleration, which in turn anchors global growth and inflation, and casts a pall over commodity prices," wrote analysts led by Phoenix Kalen, head of emerging-market strategy in London. 



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