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Evergrande: A real estate giant

Evergrande Group, formerly called the Hengda Group, has been in the news recently over its inability to pay interests on its huge debt obligations. Evergrande, an estate group, is the second-largest property developer in China that was established during the period of mass urbanization in 1996 by Xu Jiayin. It was formed in the Cayman Islands, and its headquarter is situated in the Houhai Financial Center in Nanshan District, Shenzhen, Guangdong Province, China. The company shows up in the Global 500 for its revenue. It has about 200,000 direct employees and helps maintain 3.8 million jobs through its operations in 280 cities across China. The core job of the company is to buy huge land, developing residences, and selling them to interested buyers. It owns 565 million square meters of development land and real estate projects in 22 cities. One of the most prominent projects is Ocean Flower Island in Hainan. The company uses short-term loans extended by suppliers, property buyers and large amounts of debt from banks and investors to fund its business. In 2009, the organization raised $722 million in an initial public offering on the Stock Exchange of Hong Kong. Besides housing, the group has invested in sports, electric vehicles, and theme parks. After announcing plans to enter the electric vehicle market in 2020, they have constructed three plants for the purpose. The theme park is constructed in second-tier cities which host 33 rides and focuses on Chinese and Western mythologies. This attracts 15 million annual visitors and generates revenue of $3 billion from tourism-related services. Moreover, it owns a food and beverage business, selling bottled water, groceries, dairy products, and other goods across the country. The company bought a soccer team, in 2010 known as Guangzhou Evergrande. Since then the team has built a soccer school, which is believed to be the world's biggest soccer school. The group continues to meet new records as it is working to build the world's biggest soccer stadium, which is expected to be completed by 2022. The soccer stadium has the shape of a giant lotus flower and will have the ability to hold the strength of 100,000 fans. Furthermore, it includes an artificial island with museums, malls, and amusement parks. The company recently failed to pay interest in September 2020 and is speculated to miss more deadlines. This matter has left all investors wondering if they will have to suffer losses for them.

Root cause of its downfall

The world stock markets never foresaw Evergrande facing such a big crisis. Problems started looming over the grande company last year when the real estate sector was adversely affected by the pandemic, increasing Evergrande's debts like never before. The crisis affected the company to such an extent that the company had to send a warning to its investors. It was facing a liquidity crunch, and it had left them without money to pay off its debts. Later, when Evergrande was questioned, it denied warning any of its investors. Another big reason for its downfall was its expansionary moves spread in a wide range of different categories like vehicles, food parks, groceries, dairy products, and many more. Their proliferation reportedly caused the company to continually borrow money from the market and eventually going into debt. Their situation worsened when China launched a crackdown to curb down the borrowing costs of developers and placed ceilings on their debt. As a result, the Bank of China had drafted three red lines for property developers that affected them severely. And the companies that failed to comply with those lines were not allowed to borrow from banks. Under the pressure of complying with these guidelines, Evergrande sold many unfinished projects to consumers that brought down the property rates to a huge extent. This cash crunch and the inability to pay back its investors has thrown serious questions at the company that was once the biggest real estate company in China. As of September 23, 2021, an interest payment of about 120 million dollars to the bondholders was unpaid. Similarly, according to some reports, 669 million dollars in coupon payments are due by the end of 2021.

Upshot of Evergrande's collapse

The contagion risk that has taken place in the sprawling real estate developer is concerning the Chinese economy. There are several consequences of Evergrande's probable collapse. Firstly, the banking industry would be triggered and it could lead to an adverse affair in China. According to Mattie Bekink from the Economist Intelligence Unit (EIU), "Evergrande owes money to around 121 financial firms and 171 domestic banks." Therefore, if the company defaults, there will be economic contagion risk for the banking sectors of China. Also, if Evergrande falls flat, banks may be forced to lend a minimal amount that could lead to a situation of credit crunch. Secondly, many companies around the globe are also at risk because they share business relations with Evergrande. In addition, construction and design firms are also at risk of inducing major losses that could lead them to a state of liquidation. This may also demoralize foreign investors who could have their business relations with China. Thirdly, the contagion in the property sector will badly affect the home buyers, investors, and suppliers. People have already paid deposits for their under-construction properties and plots. Thus, they could potentially lose their investment after the collapse. In September 2021, the homebuyers and investors protested for their repayment of loans. Reportedly, around a hundred investors broke out at Evergrande's headquarters in Shenzhen. These traumas are contributing to an overall slowdown in China's economic growth. According to a report from Barclays, the company has an estimated 800 unfinished projects across China, and as many as 1.6 million people are waiting to move into their new homes. Possibilities are that Evergrande's binge on the debt will threaten China's economy.

Will the government intervene to redeem Evergrande?

The piling debts are becoming unmanageable for the company. The fallout of Evergrande is approaching a financial mess and weakening the economy of China. According to the Bank of America, Evergrande sold about 200,000 housing units and did not hand them over to their buyers. A disorderly collapse of Evergrande can lead to financial instability as the company solely holds about 14% of GDP in China. People who have invested money in the properties committed by Evergrande are completely devastated owing to their ruined hopes of a house. When the investors demanded to return their investments and financial products, the founder of Evergrande tried to reassure them that their homes would be ready on time. The investors believe that the government will guarantee the delivery of the houses. Some analysts believe that the government will have to invest money in Evergrande to continue the leftover construction and sell those residential properties to pay off the debts. And with the financial support of the government, the company could become a part of SOEs (state-owned enterprises). Speculations are regarding the nationalization of Evergrande, restructuring of the company into separate entities backed by the SOEs. To stop the deepening crisis of Evergrande, people hope for the government to intervene and limit the collapse of the real estate conglomerate. These speculations became uncertain when the authorities asked the local government to prepare for Evergrande's potential downfall. There are speculations that the World Bank will limit large amounts of loans to companies in the future. However, some economists believe that the bank and bank holders will probably lose money if Evergrande restructures its debt, knowing that Beijing has the sources to avoid a credit crunch in China. The clampdowns caught the attention of a Swiss central bank that volunteered to monitor the situation. The Chairman of Swiss National Bank, Thomas Jordan, said: "Evergrande should not be dismissed as a local problem because these issues could unsettle markets." In September 2021, the People's Bank of China injected liquidity for three sessions in a row. It is thus fueling expectations that the government would want to save Evergrande.

Global market reception

Most of the major market indexes have been falling due to concerns about Evergrande Group and the impact it could have on China's economy as well as the global economy. Evergrande Group shares have dropped lowest this time in the past 11 years. Shares in the company's property management and electric car divisions have also fallen a lot as the real estate conglomerate struggles to raise the millions of dollars needed to pay interest to its lenders over the next few days. Evergrande's shares will continue to drop because no other option appears to be helping the firm alleviate its liquidity problems. According to sources, there are still unresolved questions about what the company will do in the event of a restructuring. Investors are making assumptions on whether the Chinese government will assist in bailing out the company, whose collapse will undoubtedly have an impact on the global economy. Investors are concerned that the collapse of the real estate behemoth would pose significant risks to China's financial stability and economic growth. Many are concerned that losses will force bondholders to sell other investments or sell risky securities to raise cash, harming markets that appear unrelated. Some analysts are even referring to it as China's Lehman Brothers moment, relating to the 2008 collapse of the US investment bank that clearly indicated the onset of the global financial crisis. However, the likelihood of such broader financial consequences is low. If the firm is unable to pay its dues, there will be tremors in the foreign financial markets, but they will be short-lived. Evergrande has $18 billion in impending foreign-currency bonds, with Chinese banks holding the majority of them. China's banking system is said to be capable of absorbing defaults, with an annual profit of 1.9 trillion Yuan and reserves of 5.4 trillion Yuan against bad loans. Analysts believe that even a chaotic developer collapse would just have a minor global impact. Even if it were the first of many property developers to fail in China, it is anticipated that a policy failure would be required to create a major slowdown in the country's economy. Many feel that the crypto market's recent slump was impacted by the same, as investors scrambled to liquidate their crypto holdings. The Chinese Central Bank, on the other hand, has poured 120 billion Yuan ($19 billion) into the financial sector in the hopes of rescuing Evergrande. China's default on Evergrande might be costly, and many experts forecasted that the country would do all in its power to prevent the company from failing, and their predictions tend to come true. With Evergrande considering a bailout, the crypto market could see a bearish to bullish trend flip. China has begun to inject stimulus into its financial system, and the end of September might see the bulls return to the crypto market. Because the crypto market has historically been bullish in the fourth quarter, the start of October could assist the market in resurging to its bullish ways, as it did in August.

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