Evergrande, one of China’s largest property developers, has started to repay investors in its wealth management business with property. This week, the firm will encounter a crucial examination following its announcement that major banks won’t be receiving interest on loans. On Thursday, $84 million worth of interest payments are due on bonds. Evergrande is the world’s most indebted real estate developer, and it has been struggling to meet repayment obligations amid slowing sales and competition from local rivals.
Beijing implemented new rules last year to limit the amount owed by major real estate firms. The company became one of China’s most important businesses by borrowing more than $300 billion. The new restrictions caused Evergrande to offer its properties at significant discounts for money to flow in so the firm could stay afloat. On the Hong Kong Stock Exchange, Evergrande’s stock price has tumbled by around 85% this year owing to concern over its debts. Major credit rating firms have also downgraded the country’s bonds.
Evergrande’s difficulties are serious for a variety of reasons. First and foremost, many individuals purchased the property from Evergrande well before any construction began. They’ve made deposits, and if the firm goes bankrupt, they risk losing their money. Additionally, there are the firms that do business with Evergrande, and construction and design businesses and materials suppliers may be at risk of significant losses, leading them to bankruptcy. The third problem is the potential impact on China’s financial system. The financial consequences would be far-reaching. According to reports, Evergrande owes money to around 171 domestic banks and 121 other financial institutions.
Banks and other lenders may be compelled to lend less if Evergrande defaults. When businesses struggle to obtain funding at reasonable rates, a credit crunch might occur. A credit crunch would be catastrophic for the world’s second-largest economy since firms that can’t borrow cannot expand and, in some cases, cannot continue operating. Foreign investors will be concerned by this, as it may give the impression that China is a less attractive investment destination.
The increasingly damaging consequences of a majorly indebted firm collapsing have prompted some specialists to propose that Beijing may intervene to rescue it.
Mattie Bekink, head of the Economist Intelligence Unit, speculates that: “Rather than risk disrupting supply chains and infuriating homeowners, we believe the government will most likely be able to find a method to ensure that Evergrande’s core operations continue.”
Others, on the other hand, are unconvinced. Hu Xijin, the influential editor-in-chief of state-backed Global Times newspaper, advised Evergrande not to rely on a government bailout and instead needs to save itself. This also corresponds to Beijing’s objective to control corporate debt, which implies that such a large-scale bailout would be seen as setting a bad example.
The Dow Jones, Nasdaq, NYSE, and other major American indexes dropped a lot in value throughout Monday’s morning trading sessions and have continued to slump ever since. The gold markets fell to levels not seen in six months, while the crypto economy lost over $250 billion in just 24 hours.
Even though Evergrande’s troubles have worsened, the Chinese government has yet to intervene and save it from failure. Analysts predict that while authorities attempt to limit excessive risk-taking, they will also try to prevent the problem from getting out of hand.
