What is Evergrande and is it too big to fail?
Global financial markets are on high alert as cash-strapped Chinese real estate giant Evergrande faces several key tests in the coming days.
The world’s most indebted real estate developer is expected to meet a series of deadlines for bond interest payments totaling tens of millions of dollars.
As the company struggles to keep up with these payments, it has started to reimburse some investors in its real estate wealth management business.
What does Evergrande do?
Businessman Hui Ka Yan founded Evergrande, formerly known as Hengda Group, in 1996 in Guangzhou, southern China.
Evergrande Real Estate currently has over 1,300 projects in over 280 cities across China.
The expanded Evergrande group now encompasses much more than just real estate development.
Its activities range from wealth management to manufacturing electric cars and manufacturing food and beverages. It even has one of the biggest soccer teams in the country, Guangzhou FC.
Mr Hui was once the richest person in Asia and, despite his fortune plummeting in recent months, he has a personal fortune of more than $ 10 billion (£ 7.3 billion), according to Forbes.
Why is Evergrande in trouble?
Evergrande has aggressively grown to become one of the largest Chinese companies by borrowing over $ 300 billion.
Last year, Beijing introduced new rules to control the amount owed by large real estate developers.
The new measures led Evergrande to offer its properties at significant discounts to ensure that the money was flowing in to keep the business afloat.
Today, he is struggling to pay the interest on his debts.
This uncertainty has seen the Evergrande share price fall by around 80% this year. Its bonds have also been downgraded by global rating agencies.
Why does it matter if Evergrande collapses?
There are several reasons why Evergrande’s problems are serious.
First, many people bought property in Evergrande even before construction started. They’ve made down payments and could potentially lose that money in bankruptcy.
There are also companies that do business with Evergrande. Businesses, including construction and design firms and material suppliers, are at risk of significant losses, which could force them out of business.
The third is the potential impact on the Chinese financial system.
“The financial fallout would be significant. Evergrande owes money to around 171 national banks and 121 other financial firms,” Mattie Bekink of the Economist Intelligence Unit (EIU) told the BBC.
If Evergrande defaults, banks and other lenders may be forced to lend less.
This could lead to what is known as a credit crunch, when businesses struggle to borrow money at affordable rates.
A credit crunch would be very bad news for the world’s second-largest economy, as businesses that cannot borrow struggle to grow and in some cases are unable to continue to operate.
It can also confuse foreign investors, who might see China as a less attractive place to put their money.
Is Evergrande “Too Big to Fail”?
The potentially very serious fallout from the collapse of such a heavily indebted company has led some analysts to suggest that Beijing could step in to save it.
EIU’s Mattie Bekink thinks: “Rather than risk disrupting supply chains and angering owners, we believe the government will likely find a way to ensure the survival of Evergrande’s core business. . “
Others, however, are not sure.
In an article published on the Chinese chat app and social media platform WeChat, influential editor-in-chief of the state-backed Global Times newspaper Hu Xijin said Evergrande should not rely on a government bailout and must instead run away.
It also aligns with Beijing’s goal of bringing corporate debt under control, which means such a big bailout could be seen as a bad example.
Reporting by Peter Hoskins and Katie Silver