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BW Businessworld

What Is Evergrande Crisis That Has Shaken Markets Across World?

The share price of the property sector giant has decreased around 85% since September 2020. The rating agencies have also downgraded the company’s bonds.

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The largest property firm in China, Evergrande, has been in news for the past week. The company has huge debt obligations and has been unable to pay the interest on its debt.

Since September 2020, the share price of the company has decreased around 85 per cent.  Also, the company is expected to miss further interest payments too. Let's understand why?

Evergrande And Problem

The real estate giant Evergrande employs over 2,00,000 people. Out of all the buildings constructed in China, Evergrande has constructed around 2% of the total. It has over 1300 projects in 280 cities and invests in Electric Vehicles, Sports, apart from Housing projects and restaurants. The company also owns food and beverage businesses.

The company largely functions on debt collected from banks and investors. It also collects money to function from property buyers. Presently more than 1.5 million people in China have given their money in advance to Evergrande, in return for the promise to get their properties built in future. But all this seems impossible now.

As of today, Evergrande has a debt of more than $300 billion along with an outstanding interest of $37 billion, maturing over the next one year. It has bonds worth $7.4 billion due in 2022. But the company has failed to borrow more money from Chinese financial institutions to repay the older debt. Rating agencies like Fitch have downgraded the company’s bonds to as low as 50 cents on the Dollar.

The company is unable to pay further debt and the outstanding interest and its financial position is deteriorating by the day. It also will, most likely, fail to deliver the promised properties to the buyers and investors.

Why cannot the company borrow more money?

Last year, the Chinese government passed new rules called the ‘three red lines’ that defined how much a property developer can borrow according to its financial position. According to Evergrande’s balance sheet, the company could not borrow from banks any further. So, to repay the interest last year, it had to sell its assets at very low costs. It sold some of its assets at discounts as high as 50 per cent. This led to the company’s insolvency.  

China’s GDP is heavily dependent on the property sector. According to the latest HDFC bank report, around 30 per cent of Chinese GDP is made up of the property sector alone. This has led to a vast inequality between supply and demand, creating ‘ghost cities’ across the country.

To do away with this, the Chinese government has stopped bailing out the property sector giants. It is also seen by some experts as an extension of the Chinese government’s crackdown on big private businesses. Recently, companies like Alibaba, Didi, Tencent etc. have also faced heavy fines and sanctions from the Xi government for expanding their business. Evergrande seems to be the new prey.

What Is In It For India

Talking to BW Businessworld, Kalpit Mankikar, Fellow with Strategic Studies Programme at ORF and an expert on China, said, “Indian exporters having a dependency on China’s realty will have to brace for the fallout too. Exports and imports between India and China grew at over 65 per cent between January and June this year, despite calls for boycott of Chinese merchandise following the Galwan clash.”

20 Indian soldiers were martyred in a seven-hour conflict with the Chinese troops in the Galwan Valley in eastern Ladakh on 15th June 2020. India and China have been at loggerheads since then.

Mankikar further stated, “This year, India’s top exports to China were iron ore, petroleum products, organic chemicals, spices, seafood, iron and steel, aluminium products and rice. Our exposure to iron ore is maximum. China remains India’s second-largest export market after the US, and efforts must be made to reduce our dependency on it.”

Any slowdown in the Chinese economy can send ripples across the world and affect the global supply chains. But the bigger lesson, according to some experts, is that the policies and politics of Xi Jinping government are unpredictable. It remains to be seen if the Chinese government will bite the bullet and bail out Evergrande or let the situation spiral further downwards.

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china Evergrande property sector