Global equity markets are witnessing a sort of meltdown at a time when they are flush with access liquidity. And guess what? It is not because of any macro factor or a probable new variant of coronavirus coming in. It is because of a crisis in just one Chinese company: Evergrande.
So, what is it all about?
China Evergrande Group – one of the largest retail developers in China – had an outstanding debt of CNY2 trillion (US$310 billion) as of June 30. This huge pile of debt made it the most leveraged publicly traded real-estate management or development company in the world.
Of this total outstanding debt, CNY240 billion (US$37.3 billion) was due in the next one year – almost 10% of the company’s total borrowings.
This debt amount was nearly three times Evergrande's cash holdings worth CNY86.8 billion (US$13.5 billion).
What Is China Evergrande and Why Is It in Trouble?
Evergrande is one of China’s largest realtors. The company claims to own over "1,300 projects in more than 280 cities in China and is a forerunner in delivering to all houses with fine decoration".
But why are you counting numbers?
Behold, till we come there. Let me explain some basic facts here.
Till the beginning of 2021, China’s vast property market was seeing its Go-Go years – despite the world seeing its worst recession in 100 years.
Demand for real estate – both commercial and residential – in metro cities like Beijing, Shanghai, Shenzhen and Guangzhou was leading to skyrocketing prices – one of the highest in the world.
In a bid to cope up with this surging demand, Evergrande took a spree of loans in a bid to keep the growth engine revving.
But then came what many had feared in the market. An impending fall in property prices hit smaller cities at the beginning of 2021. This was coupled with a series of measures by the government, which has been overzealous with corporate crackdowns, aimed at excessive borrowing in the real estate sector. And then, the cookie started to crumble.
How had the cookie started to crumble?
Remember, we had talked about heavy debt and low cash flow that the company was witnessing. Of that amount, the company is slated to repay US$83.5 million in interest relating to its March 2022 bond by tomorrow (23 September).
Yet another tranche of repayment is coming up next week – when it will have to repay US$47.5 million on September 29 for its March 2024 notes. Most likely, the company will default on these repayments due to a severe liquidity crunch it is fiction.
Will it impact other sectors?
Yes, of course!! Many peg it as China’s Lehmann Brothers moment. However, China being a centrally planned economy, this seems far-fetched. There are also concerns about Huarong, a Chinese state-owned financial conglomerate that has liabilities of nearly US$240 billion. Huarong is reported to be in trouble as well, escalating the perception of a wider systemic crisis in China. But then the Chinese banks that have lent to Evergrande would surely be hit.
In case, there is a contagion and other realtors also get hit, there could certainly be a slowdown as far as to demand picture across many of the metals. So there really is the concern on the commodities front as well.
Evergrande is in mess. China has overleveraged itself. It is also widely known that the property boom in China has over-lasted. But we also know that Evergrande “is set to default” and that it has not defaulted yet. And as they say, it doesn’t happen till it happens. So, let’s watch out for what transpires there.