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The Evergrande Crisis: What Effect Will it Have on the Global Economy?

When a big company of any kind experiences a visible wobble and question marks over their finances start to arise, it can send ripples of concern around the global stock markets.

When the company in question is as big as Evergrande, those ripples become more like a tsunami, threatening to engulf the sector.

Evergrande is the second-largest property developer in China, a company that has serious economic clout. It has experienced a catastrophic year so far, with more than 80% wiped off its share value, and it has now reached a point where there are real fears that it won’t be able to survive.

The immediate crisis appears to have been averted but will it be able to survive in the longer term? And if it doesn’t, what will be the effect on the rest of the world’s economy? Here’s a look at the facts.

Who Are Evergrande?

If you’re not familiar with the property sector, the name of Evergrande may not have been on your radar before. However, they are the second-largest property developer in China and have been involved in more than 1300 major building projects in 280+ locations across the country.

Founded in 1996 by Xu Jiayin, an ex-steel executive, the company has grown to become an economic giant and is now part of the Global 500. This means it’s one of the biggest companies in the world by revenue.

Although China relies heavily on this entity for property development, its interests extend way beyond just real estate. They own several theme parks and have invested heavily in sports, electric vehicles and food/drink. They own a football club and a grocery chain, which sells bottled water, food, dairy products and other groceries worldwide.

They are a company that has continued to reach for new enterprises with a goal of moving into multiple sectors. And it’s because of this, any wobble in their performance will significantly affect indices trading on S&P 500 and FTSE 100, not just Chinese property investments.

Why Is Evergrande In Trouble?

It seems inconceivable that such a successful multi-billion company could totter on the verge of collapse, but they have been heavily reliant on finance in recent years. With more than $300 billion of liabilities, they are now the most indebted developer in China.

This level of financing caused Evergrande to issue a warning about cash flow shortages, issuing a statement to caution that it could face a default if it can’t raise sufficient funds quickly.

Although many have pointed to the company’s rabid appetite for expansion as the root cause, the truth is that their story is typical in China, albeit on a smaller scale. Many state-owned companies in China defaulted on their loans in 2020, leading to concerns about the country’s reliance on debt-funded investments to fuel their growth.

If Evergrande cannot clear its current financial difficulties and goes under, it will be one of the biggest financial tests that China will have had to cope with in many years.

Is There a Route Forward?

Amid the widespread market panic, Evergrande confirmed that the payments due on a domestic bond had been “settled through negotiation”. No further details were provided, and more crucially, the company has remained silent on whether it could meet another $83.5 million interest payment due last Thursday.

With no buyers found so far for some of the services it is trying to sell off, and a group of financial advisors brought in to explore “all feasible solutions”, the business is not out of trouble yet. The market has been well aware of the company’s increasing woes; since the start of the year, over 85% has been wiped off its share value.

Some sources have described this as a Chinese “Lehman Brothers” moment, referencing the collapse of the investment bank, which caused the financial crisis in 2008. Others have dismissed the suggestion that the impact of an Evergrande collapse would be quite so catastrophic.

However, all agree that there would be a very significant contagion across the market, causing severe damage to the fragile Chinese economy and triggering a global response.

Featured image source: wikimedia

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