China’s Evergrande Creates Market Anxiety

Evergrande started in 1996 in Guangzhou, southern China, as the Hengda Group before a name change. Founded by businessman Hui Ka Yan, it owns over 1,300 projects in more than 280 Chinese cities and is China's second-largest property developer. The company has expanded its portfolio to operate more than real estate development, with a wealth management firm, electric car manufacturer, healthcare services firm, video, and television production, theme park, a football team (Guangzhou FC), and food and drink manufacturer. 

What Went Wrong?

Evergrande used debt to rapidly grow its portfolio, resulting in a more than $300 billion deficit. Even more concerning is that the company became the world's most indebted property developer, and the situation started to get worse in 2020 with two significant events. The first was the global pandemic which forced countries to shut down their economies, which led to delays in construction and lower consumer demand for high-value expenses like property. Another turning point was new rules from Beijing that sought to reign in debt by prominent real estate developers. According to firms' cash flows, assets, and capital levels, this regulation limits money they can owe.

Will It Be a Domino Effect?

Evergrande's customers are worried. Many of them bought property before construction began, so if China Evergrande falls, they may never get their money back. It is also one of China's largest companies, so many construction companies, design firms, and material suppliers could make significant losses.

Moreover, this downward inclination could spread from the financial sector to others in the company, if not the whole industry. Evergrande has loans with around 171 domestic banks and 121 other financial firms. If Evergrande becomes fragile, these firms will lend less to other economic sectors, creating a credit crunch that can down the entire economy.

Evergrande had to discount its properties to stay afloat, but its prospect didn't improve. It has also been struggling to meet its debt obligations. Its share price has fallen 80% this year, and its bonds have been downgraded by global credit rating agencies citing its liquidity problems. In September, the company issued warnings that it may default on its debts and missed the payment deadline in the same month. The company can pay off within the 30 day grace period, narrowly avoiding a default.

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