The biggest question today to be asked in the Asian Continent is will Evergrande be Asia’s Lehman. The Company started with selling bottled water and pig farming in 1996 was once a brand identity of the real estate boom in China. In 1996 just as china’s property boom was beginning to take off. The rapid success in real estate –Evergrande was managing more than half a billion square meter apartments which is the size of a small city.
The Evergrande fund crunch is worsening and china’s biggest and indebted developer, this led to a regulatory crackdown for the entire country’s real estate sector. Will this spiral into a global financial contagion, is the common concern?
Motive of the Crisis at Evergrande?
The most expensive soccer team owning company had been the dream seller for the Chinese middle class people. There is unique politics behind this unique distinguished the reputed real estate sector. The Chinese local government were highly dependent on sales of the lands for the revenue generation, according to some economists estimates to 50% of the local revenues. This was very much necessary for them to develop the infrastructure projects and the social welfare measures. This clearly shows the Local Governance dependence on Evergrande for the continual infrastructure development and for local revenue generation.
The Evergrande model clearly explains how china’s real estate sector became the key player in the Macro Economics pf China – The growth of Evergrande was exponential and fast. The 29% of China’s GDP contribution comes for the real estate sector. According to an estimate if there is 20% fall in the real estate activities, it may lead to a fall in the GDP by 5% to 10%. The Evergrande expanded its operation in more than 250 cities of china, by selling a middle class home dream to the Chinese.
What went wrong?
The two things that triggered the crisis at Evergrande is, the Chinese government change in policy to introduction of toughest measure in terms of monitoring and auditing. The Chinese Central bank put in place what is called “three red lines” that would force indebted developers to start deleveraging and bar them from getting new loans unless they fulfilled certain financial targets. A strict regulation was introduced to monitor the future lending and the Government kicked off probes into the high borrowings of the property developers. Evergrande had no option but to start selling of some of its business. The post pandemic, the slowing down of the global property market and very specifically the china’s property market and the fall in demand for new houses squeezed the cash flows. These two were the major reasons for the cash crunch in one of the prime company in china.
Now the major crisis for the company is the $300 billion liabilities burden that has decimated its credit rating and share value. To add to the salt, it has nearly 800 unfinished residential building, many unpaid suppliers and over a million home buyers who have partially paid a price and bought the dream of owning a property
Evergrande crisis and the Systemic risks:
The Asian Continent biggest economy has been responsible in the post-pandemic global recovery, they have been the first, in terms of controlling the Pandemic virus spread and its impact of the lock downs in the first quarter of 2020, this made the country the key driver in the global commodities market upcycle.
The Chinese economy from the mid -1990s started extending the property boom, from the last three quarters the country’s household wealth was exclusively concentrated in the housing sector. The concentration on one single sector of the real estate, the collapse of it will lead to serious knock – on – effect on the entire economy. This is a very dangerous situation since the growth of the economy will be dragged and it is a cascading impact on the global economy and financial markets.
Along with this there is also a great concern about Huarong, it is a state owned financial conglomerate and it has a liability of nearly $240 billion. Even this is in trouble as well and this has led to escalating the systemic crisis in China. Hopefully the Chinese Communist party will do something to clean the system and ensure that there is no spiral effect on the economy and financial markets.
The Global Monday was not a good Monday, the selloff on Monday was not fairly widespread, the key indices across the Asia-Pacific and Europe started crashing sharply.
The entire World’s fortunes biggest got hit in the stock markets, with the top rich 500 people over all loosing $135 billion. The founder Chairman of Evergrande, wealth ranking dropped to $7.3 billion from $42 billion once in 2017.
The Financial Distress of China:
The major problem of the spreading financial distress is a much more serious problem and one that the regulator seems not to have expected to this extent. The property purchase market has fallen very rapidly, and the investors in retail sector and property purchases are totally protesting in most of the cities. On the other hand, the retail suppliers and the contractors are making huge losses, since they have been paid in real estate, they should sell the assets at the earliest to satisfy their own liquidity needs. This will disrupt the entire real estate market further.
The major option is targeted bailout that can come to the aid of some but not all creditors. The same time, the ruling party in China is well aware of the measure to be taken to decrease their losses in the short term, however this will really end up demanding a longer term structural change. This may lead the economy to still more internal difficulties.
The China Evergrande Group debt – turmoil may lead to a major financial crisis like the Lehman Brothers. It will also lead to slowdown of the China’s Economy. This is an alarm to the danger lurking debt laden economies.
In the global property market, the Evergrande’s unwinding could be very messy. It can be very messy to both Chinese Economy and the Continent. It could push Beijing to find ways to mend the economy ahead of the next year’s 20th Communist Party Congress. The Global Investors will start rethinking alternative investment options for the future sustainable investment. A Million dollar questions will keep being popping up, which we will get answers in the coming days.
- How does it impact India and global markets?
- What impact it has on the metal segment India’s stock markets.
- Can Evergrande crisis cause financial disruption Globally?