Evergrande is a Real Estate company that was founded in 1996 and took off during China's housing boom. They are China's second-largest Real Estate company, but they are now in debt of over $305 Billion. This is raising major concerns in both China and the global economy. Global markets have been selling off as a result of the "company warning its invest it could default on its debts." I would argue that the major concern is in China though due to the fact that Evergrande has $1.4 million of prepaid homes by the homeowners themselves that have yet to begin development. According to the article, Evergrande has over 200,000 direct employees and is indirectly responsible for another 3.8 million. There has been some discussion whether the Chinese government should step in and help the company due to the number of people that this Evergrande has an impact on.
It is thought that the main reason that this powerhouse of a company is on the verge of bankruptcy is due to China's increase in its regulation. The government has been working to control the price of houses to make them more affordable to live in. With labor and resources remaining constant, this leads to the loss of returns that Evergrande can make off of their real estate properties. There is a lot of fear in the banks right now due to "128 banking institutions and 121 non-banking institutions" being exposed to Evergrande.
This situation should unfold rapidly as many are predicting that the Chinese government will have to make its decision in the coming days. It will be interesting to see what the Chinese government decides to do and how it impacts the market.
Source: https://www.weforum.org/agenda/2021/09/evergrande-debt-crisis-global-economy/
2 comments:
It really is a sticky situation right now in Beijing. There were economists who predicted that the housing bubble was going to burst in China as early as 2010 because the housing prices have been ridiculously high in big cities like Beijing and Shenzhen. It is more affordable to live in London than in Beijing, Shenzhen, Hong Kong, Shanghai, and Guangzhou. The only reason why the housing bubble has not burst therefore create an economic recession is that the Chinese government has been trying its hardest to maintain the stability of the housing market mostly through regulations to make housing choices more affordable for consumers. But then as we see now, big housing developers like Evergrande are on the brink of insolvency. As big and messy as Evergrande is, if it were to fail, the broader economy will suffer consequences. Beijing needs to act quickly in terms of this situation and it would be very interesting to see what's their next move.
The situation with Evergrande definitely puts China in a bad situation as they have continually bailed them out of danger in the past. Now, they have still not learned from their mistakes and even lied about how precarious their financial position really is. Not to mention that a lot of China's economy is based on leveraging debt as up to 25% of their GDP comes from debt borrowing.
If China does not take swift action, Evergrande could start a ripple effect across the entire capital market. There have also been pockets of social unrest as people begin to see the danger ahead and the potential money they could lose in this situation.
Evergrande has about 30 days to officially pay their interest payments before it is deemed a default. So hopefully regulators are able to resolve this critical issue.
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