Chinese Evergrande Group On The Brink Of Collapse

Recently, the crisis spooked some protestors who gathered outside the company’s headquarters, eager to find out about its future.

Many investors are becoming increasingly nervous that if Evergrande were to collapse, it would cause a contagion across China’s banking and property sectors. An Evergrande downfall stands to cause global ripple effects with repercussions that would be felt far and wide. Here’s why you need to be on the lookout:

Brief Evergrande Group History

Prominent businessman Hui Ka Yan founded the Evergrande group in 1996, previously known as the Hengda Group in Guangzhou, southern China. The company has grown gradually, and it became the world’s most valuable real estate company in 2018.

Today, Evergrande Real Estate company owns more than 1,300 recorded projects in about 280 cities all over China. The broader Evergrande Group embraces more than just real estate development. It has several businesses, including making electric cars, wealth management, beverages, and food manufacturing. It even sponsors one of China’s most prominent football teams Guangzhou FC.

According to Forbes, Mr. Hui Ka Yan is one of Asia’s wealthiest people despite his wealth recently plummeting with a net worth of more than $8.8 billion.

Why is Evergrande on the Verge of Collapse?

Evergrande proliferated during China’s housing boom by borrowing over $300 billion. However, as residential home sales started declining in recent years, Evergrande’s debt grew, and the company opted to diversify into other investment fields. The company has over 200,000 direct employees, and it’s also responsible for over 3.8 million jobs every year.

Last year, Beijing introduced new rules to regulate the amount owed by prominent real estate developers. These regulations caused Evergrande to offer its properties at huge discounts to make sure the business was getting money to keep it afloat. Currently, it can barely meet interest payments on time for its debts. This instability has seen the company plummet by over 80% in 2021.

Why You Should be Worried if Evegrande were to Collapse

There are several reasons why Evergrande’s issues could be fatal to everyone and the world’s economy.

Local Repercussions

Evergrande’s collapse would be the most significant test on China’s financial system in a long time. As early as 2018, China’s Central Bank highlighted that companies such as Evergrande posed a systemic risk to the nation. China’s real estate sector accounts for 30% of the total Gross Domestic Product.

For China and its economy, the most significant fear is the potential spillover effect that would affect the entire country’s economy. Covid 19, the deteriorating geopolitical relationship with the West and reinforced ideological campaign to affirm the influence of the ruling communist party have already contributed to fears of a prolonged slowdown in the country.

It is said that Evergrande owes money to about 121 financial firms and 171 domestic banks. Thus, if the company is declared bankrupt, the banking system will have dire implications. A credit crunch could succeed, and analysts fear it would be bad news for China and the global economy. This credit crunch would also mean that they’d find it hard to grow or continue operating because firms can’t borrow.

Beijing is in a dilemma – if it bails out the company, what message would it send to other heavily indebted developers? And if it does not, the effect would be transmitted to other sectors of the economy.

What about International Implications?

It is tough to tell, but what’s clear is that the world should diligently observe asset prices and debt levels to preserve the health of our already fragile economy. A possible Evergrande default would cause a considerable drag on the world’s property sector. If China were to have an economic crisis due to the Evergrande Group, the global economy would feel the ripple effect.

Investors are becoming increasingly jittery that a collapse may spread to other property developers, illuminating systemic risks or vulnerabilities. The fall of Evergrande will also have an enormous impact on the international supply chain. Various firms, including design and construction firms and materials suppliers, face possible loss rounds. It will also have an enormous impact on the international supply chain.

Moreover, given that cryptocurrencies have become a significant part of the economy. However, if the economy gets hit by the Evergrande fall, most financial institutions will suffer. That would also mean decreased investments in cryptocurrencies or withdrawal of funds as banks limit loans due to the potential credit crunch.

There are also major concerns about the possibility of Evergrande owning some debts in the form of crypto. Tether, in particular, is believed to be owed money by Evergrande. However, the company has since stated that it has no relations with Evergrande.

The crypto market was designed to act as an alternative to traditional finances, and it wasn’t meant to have any correlation. However, the economy has evolved, making the crypto market a more significant player. Thus, major changes, such as the Evergrande fall, are a concern.

Whether or not the crypto market will plummet is yet to be determined. How the cryptocurrency market reacts to the default will provide investors with an insight into the factors that drive crypto valuations. The cascades of defaults are something that would affect not only the crypto markets but also the global markets as well.

Final Word

The potential fatal fallout of such a hugely indebted company failing has led to some analysts suggesting that Beijing may step in. While it’s still not clear what might happen to Evergrande, the most likely outcomes include a breakup, buy-out, bankruptcy, or a possible bailout from the government.

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