The potential collapse of the largest Chinese property developer, Evergrande, has shaken the international market. The Chinese Real Estate Major is $305 billion in red and on the brink of explosion.
The markets are under fear of the possible impacts on the economies. With a debt of over $300 billion and declined sales, the Evergrande crisis could result in a global financial crunch! Based in Guangzhou, the second-largest property developer of China was once known for allowing ‘affordable apartments to working families.’
With China’s property boom, the company soon spread to 280 cities and became the most prominent face of China in the real estate sector. Its real estate companies very much drive China’s economy. They contribute almost 30 per cent to the Chinese GDP (data as stated by the National Bureau of Economic Research).
Why Evergrande takes the Spotlight?
As Evergrande expanded and acquired assets over the years, it accumulated over $300 billion in debt. However, due to the pandemic ad other issues, property sales have kept declining for months. In a statement issued by the company, they said that the cash flow into the company might keep dropping as it continues to fall.
Apart from the bondholders, the company also owes around 667 billion yuan ($103 billion) to construction companies and other business creditors.
Now, the banks have stopped lending to the property developer after its cash flow showed recession. This further downgraded the company, and its liquidity concerns arose! Evergrande looks forward to repaying the debt with real estate and parking spaces. It also tried to spread to other businesses but received no positives.
Impacts on the Global Market
The possible preview to the colossal crunch that Evergrande might bring in has already begun. The looming crisis has already pulled down the global share market.
As of September 21, the global stock markets were under the fear of contagion. The China, Taiwan and South Korean Markets went tense, ranging near flat to almost 2% drop in Japan. In the consequences of the Evergrande panic, the Shanghai-based property magnate Zhang Yuanlin lost around $1 billion in Hong Kong’s trading floors.
The toppling of China’s real estate market could therefore send ripples across the globe. The biggest concern is that the bondholders facing the loss could sell other investments or give up on riskier assets to raise cash. The process would hurt otherwise unrelated businesses. Hence the catchphrase ‘contagion’ is being popularised.
As the markets open, the investors keep a close watch to if Evergrande will default!