Explained: What is Evergrande crisis all about?

September 21, 2021 08:37 PM PDT | By Furquan Moharkan
 Explained: What is Evergrande crisis all about?
Image source: © Timonschneider | Megapixl.com

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.

Bottom Line:

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.


Disclaimer

The content, including but not limited to any articles, news, quotes, information, data, text, reports, ratings, opinions, images, photos, graphics, graphs, charts, animations and video (Content) is a service of Kalkine Media LLC (Kalkine Media, we or us) and is available for personal and non-commercial use only. The principal purpose of the Content is to educate and inform. The Content does not contain or imply any recommendation or opinion intended to influence your financial decisions and must not be relied upon by you as such. Some of the Content on this website may be sponsored/non-sponsored, as applicable, but is NOT a solicitation or recommendation to buy, sell or hold the stocks of the company(s) or engage in any investment activity under discussion. Kalkine Media is neither licensed nor qualified to provide investment advice through this platform. Users should make their own enquiries about any investments and Kalkine Media strongly suggests the users to seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice), as necessary. Kalkine Media hereby disclaims any and all the liabilities to any user for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising from any use of the Content on this website, which is provided without warranties. The views expressed in the Content by the guests, if any, are their own and do not necessarily represent the views or opinions of Kalkine Media. Some of the images/music that may be used on this website are copyright to their respective owner(s). Kalkine Media does not claim ownership of any of the pictures/music displayed/used on this website unless stated otherwise. The images/music that may be used on this website are taken from various sources on the internet, including paid subscriptions or are believed to be in public domain. We have used reasonable efforts to accredit the source (public domain/CC0 status) to where it was found and indicated it, as necessary.


Sponsored Articles


Investing Ideas

Previous Next