What is going on: Evergrande, China’s second-largest property developer, has borrowed more than $300 billion, and is now on the brink of collapse.
How did it get here🤷: Last year, Beijing set new rules to control the amount owed by big real estate developers, which constricted Evergrande’s ability to generate revenue from new projects. This led to Evergrande offering its properties at major discounts to ensure inflows of money do not stop. Evergrande has been struggling to pay its suppliers and warned investors that it could default on its debts. On Thursday, 23rd of September, Evergrande is expected to default on its interest payments. However, since state-owned banks are the senior-most creditors, they will get paid first when Evergrande begins scraping to pay back creditors. Everyone else…will be left with nothing. This. Is. Huge.
Affected markets📉: Hong Kong’s broader stock market went down 3.3% on Monday. European markets also declined, with the region-wide Stoxx 600 down 1.7% and markets in Germany and France by 1.9% and 2%, respectively. The FTSE 100 lost 1.3%. Even our beloved EGX30 closed -1.64% yesterday.
Falling markets are not the biggest concern😲: In the likely event that Evergrande defaults, a “cross-default” will probably occur. Cross-defaults happen when a default in one situation leads to defaults in other situations. The parties that would be most affected are banks, suppliers, home-buyers, &investors. A domino effect will hit banks with large exposure to Evergrande, forcing them to restructure their loans or go under. Social unrest has grown in recent days following protests on the matter in several Chinese cities. Investors have shown up at the company headquarters demanding repayments on their loans. Suppliers will also be hit hard, as Evergrande is looking to preserve cash for loan repayments by offering suppliers compensation in the form of properties.
Evergrande’s survival is a topic of its own🎫: Analysts are divided on whether it is even possible for Evergrande to collapse. Some are dubbing Evergrande as the Chinese Lehman Brothers, who filed for bankruptcy in 2008, while others see Evergrande as “too big to fail,” hinting that the Chinese government will step in to bail out the Chinese giant.
Is Evergrande too big to fail🤔: The Evergrande crisis has been brewing for a while now, and warning headlines have been around for more than two weeks. But for some reason, global equity markets decided to acknowledge the existence of a crumbling real estate giant in one of the largest property markets in the world just yesterday. Some analysts argue that investors are justified in looking past the Evergrande-related saga. The real estate sector in China accounts for nearly a third (~28%) of China’s GDP. Analysts & experts believe that China will not allow for a full-blown crisis to develop, and will inevitably take matters into its own hands. But just like the Lehman Brothers’ collapse on September 15, 2008, no-one genuinely thought Evergrande would crumble until it did.