Chinese real estate giant Evergrande is on the brink of bankruptcy. The company’s shares on the Hong Kong Stock Exchange are rapidly falling in price: in less than a year, they have lost 84% of their price. This came after the firm announced the scale of its financial problems. According to media reports, the company’s total debt is currently about $ 300 billion.
Until recently, Evergrande was the second largest property developer in the PRC. If the Chinese giant defaults, its many creditors and suppliers will suffer huge losses. And that doesn’t stop there: analysts point out that the possible collapse of such a large enterprise poses serious risks to China’s financial stability and economic growth. This could turn into problems for the country’s banking sector and, in the worst case, cause a chain reaction, says Horst Löchel, an expert on Chinese economics and professor at the Frankfurt School of Finance and Management.
Some experts even compare the current situation with the bankruptcy of the American investment bank Lehman Brothers, which led to the 2008 global financial and economic crisis. Most observers, however, believe that such large-scale consequences can still be avoided this time.
Collapse Evergrande was predictable
How did a developer as successful as Evergrand end up on the brink of bankruptcy? This is primarily due to its economic model and the characteristics of the Chinese market. The rapid development of the company was primarily due to the fact that against the background of the growth of the Chinese economy in the country, the demand for real estate sharply increased – both among ordinary citizens and entrepreneurs. And this, in turn, led to an increase in housing prices.
Residential complexes in China, built by Evergrande
The PRC government is now trying to slow the latest trend – among other things, by limiting rental prices in cities so that apartments remain affordable for the population. Evergrande, in turn, focused only on expanding the market and at the same time included very small margins in the calculation. In recent months, this house of cards has become less stable and is now ready to collapse.
In addition, the top managers of the company obviously took care of their own enrichment. Contrary to the rules of Evergrande, six of its leaders in early 2021 sold their stakes in the firm ahead of schedule on the stock exchange.
Will they save Evergrande Chinese authorities?
Evergrande’s board of directors, however, has vowed to honor its commitments to buyers, investors and banks. For example, the company announced that it is ready to pay off small investors with real estate.
Horst Löchel
At the same time, the question of whether the Chinese authorities will save the industry giant is still open. Professor Horst Löchel is confident that the PRC government will not allow such a large enterprise to go bankrupt, because the risks for the country’s financial system would be too great. In addition, the availability of affordable housing is an essential part of the social security system for Chinese retirees, the expert notes.
However, not everyone is sure that Evergrande will be helped by the authorities. “Those who initially consoled themselves with the hope that the Chinese leadership will take steps to save the company, is forced to admit that such a scenario is becoming less likely every day,” said Markus Schön, head of financial company Schön & Co.
What are the consequences of failure Evergrande?
At the moment, the main question is what consequences the bankruptcy of Evergrande would have led not only in China, but also beyond its borders. Markus Schön notes that China’s real estate sector remains relatively closed, so large-scale consequences can be avoided.
Horst Löchel is of the same opinion. In his opinion, what is happening is likely to make investors think about whether they should continue to invest in the Chinese economy and buy Chinese bonds or stocks. “Such questions create uncertainty in the market,” the specialist notes.
The plight of Evergrande, however, has already affected the world’s stock markets. The Hong Kong stock market plunged 3.9% and fell to its lowest level in a year. The negative sentiment spread to European stock indices, including the DAX and FTSE. As investors worried about the possible bankruptcy of Evergrande, the stock market began to sell off.
Mining stocks also fell, with investors fearing that Evergrande’s plight will negatively impact China’s economic growth. “Given that China is the world’s largest consumer of many minerals and metals, any downturn in the PRC’s economy will have a significant impact on commodity demand,” Russ Mold, a spokesman for AJ Bell, told Reuters..
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