Understanding China's Evergrande Crisis that affected the Global Market.

Founded in Guangzhou in 1996 by Chinese billionaire Xu Jiayin, Evergrande is one of the biggest real estate developers in China. The company made its name in building residential property. Currently, it owns more than 1,300 projects in over 280 cities across China, according to its corporate website.

It later diversified into electric vehicles, sports and theme parks, food and beverage business, bottled water, groceries, and dairy products. The company employs around 200,000 people and generates more than 8 million jobs each year, the website says. In 2010, the company bought the Guangzhou Evergrande soccer team, which has built the world’s biggest soccer school at a cost of $185 million. At present, the company is working on building a lotus-flower shaped soccer stadium at an investment of $1.7 billion with a seating capacity for 100,000. A Fortune Global 500 group enterprise, Evergrande is listed in Hong Kong. The real estate giant reported $110 billion in sales last year.

What has happened now and what is the problem here?

Evergrande is scrambling to repay $305 billion to lenders, suppliers and investors due to a cash crunch. The Chinese property giant is on the brink of collapse and this could have implications beyond China’s borders, as the analysts have warned.

Evergrande’s debts rose when the company borrowed to finance its other projects. It also sold apartments at a faster rate even with low margins with the hope to raise cash and buy land again. This year in September, a leaked letter allegedly from the company, seeking support from the government for a listing plan, sparked concerns among investors. The company denied having written such a letter. On the request of Guangfa Bank, a Chinese court froze a bank deposit worth $20 million held by the firm in July.

What about the Risk and the value of the debt?

Banks, suppliers, home buyers and investors are all likely to feel the heat of a bankruptcy if it happens. The company said its situation may lead to “cross default” where one default triggers obligations in others. In 2018, China’s central bank had warned that companies like Evergrande might pose systemic risks to the country’s financial system. More than 128 banks and 121 non-banking institutions are exposed to Evergrande liabilities. According to JPMorgan estimates, China Minsheng Bank has the highest exposure to Evergrande. Evergrande also holds 4% of Chinese real estate high-yields in the dollar bond market. Defaults would trigger sell-offs in the high-yield credit market as well. Investors have started to feel the heat, with the company’s shares plummeting nearly 80% so far this year. Trading of its bonds has been halted several times by Chinese stock exchanges in the past weeks.

Evergrande’s interest-bearing debt stood at 571.8 billion yuan ($89 billion) at the end of June. It was 716.5 billion yuan at the end of 2020. Its total liability stood at 1.97 trillion yuan, accounting for about 2% of the country’s GDP. The company has been criticised for borrowing from trusts, wealth management products and commercial papers. It stepped up deleveraging efforts last year after regulators introduced caps and hoped to meet all the requirements by the end of next year. However, on September 14, the company said its plans to raise money through asset and equity sale failed to make any progress.

Why is it affecting markets globally and how did the global markets react?

The global sentiment is that Evergrande cannot pay the debt obligations this week that are part of $300 billion in liabilities. Some investors believe that the group might become China's Lehman moment, referring to US investor bank Lehman Brothers' collapse in 2008 which led to a global financial crisis.

However, the risk of such wider financial fallout is low. If the company is unable to pay its debts, there will be tremors in the foreign financial markets but it will be temporary.?

Evergrande has $18 billion of pending foreign-currency bonds but most of it has been held by Chinese banks. In the event of defaults, China's banking system can reportedly absorb it, as it has an annual profit of 1.9 trillion yuan and reserves of 5.4 trillion yuan against bad loans.

On Monday, the Dow Jones Industrial Average dropped 701 points, 2.04%, as concerns over Chinese property giant Evergrande Properties’ ability to make debt payments. The S&P 500 and the NASDAQ also saw larger than 2% drops. The plunging stock market wasn't just contained to the United States. Hong Kong’s Hang Seng index plummeted 3.3%, Germany’s DAX 30 dropped 2.31%, France’s CAC 40 slumped 1.74% and Britain’s FTSE 100 leaked 0.86%. The real impact of the Evergrande crisis is yet to be seen. Indian benchmark indices?Nifty?and Sensex fell on this account on Monday, they seemed to have recovered to an extent on Tuesday i.e. 21st September 2021. 2021 has seen the stock market post steady growth, but a collapse from Evergrande and the ensuing ramifications could see some of those gains undone. Evergrande Properties stock sank by as much as 19% on Monday, and it brought other Chinese companies along for the ride, with some comparing the ripple effect to the 2009 Financial Crisis.

?What’s Next for Evergrande Now?

If Evergrande isn’t able to repay its creditors and goes bust, how the Chinese government handles the situation could become paramount. It is estimated that 78% of urban Chinese wealth is tied up in residential property.

If Beijing rescues the firm, it could ease the fears of a Chinese economic downturn hurting the global market. However, if Evergrande is left to flounder, it could leave 1.5 million people who have already purchased properties currently under development out in the cold, as well as send China’s real estate market and its economy in a downward spiral.