The Evergrande Crisis: Explained!
China’s second-largest property developer, Evergrande Real Estate Group, is in deep waters owing to the astronomical debt of more than $300 billion. The company has been scrambling to raise funds and pay their dues off but in vain. Numerous concerns are accruing as this company’s default could spell disaster for China’s property market. The news not only affected China’s social and economic equilibrium but also triggered chaos across global markets.
Read on to understand what went wrong, why people dread this potential default, what is the Chinese government doing and, what impact did it have on the global markets? But first, let’s see how big a deal Evergrande is!
Evergrande: A real-estate conglomerate
Evergrande commenced in 1996 in the Chinese province of Guangzhou, selling bottled water and later turned to pig farming. It today owns 1300 real-estate projects in over 280 cities. Founded and headed by the chairman Hui Ka Yan, Evergrande became the “poster boy” of the Chinese Real Estate boom. According to the National Bureau of Economic Research, the real estate sector forms about 30% of the Chinese economy. Therefore, real estate has played a significant role in boosting China’s economy, not only before the pandemic but also in the post-pandemic phase.
Evergrande successfully sold house-ownership dreams to working middle-class families, such that every fourth house sold in China belongs to Evergrande. Over time, Evergrande also diversified into other businesses like entertainment, EV production, life insurance, theme park construction, TV & Films, mineral water, food and baby products’ production. With a sales revenue of over 8 lakh crores in FY 21, the company became a part of the Global 500. It also boasts of dealing with over 38 lakh contractors and sustaining about 1.2 lakh employees.
So now the question is that if the company seems so profitable-
What brought Evergrande into the spotlight?
On Tuesday, September 21, a letter sent by Evergrande’s CEO Xu Jiayin to his employees leaked on social media. The letter hinted towards the company being in trouble and stated that it would get past this “darkest moment” with support from its leaders and employees. The news about Evergrande’s $300 billion debt, leaked in mid-September, immediately drew reactions from global markets. Alongside, investors, employees, and suppliers began to swarm Evergrande’s offices, demanding answers and clarity about the company’s financial state.
The story behind this snowballed debt
Ever since the liberalization of China’s real-estate industry in late 1990’s, prices of real estate in China have been on a roll. The flourishing industry attracted many businessmen; one among them was Mr Hui Ka Yan. The relaxation of house-ownership policies by the banks and central government encouraged property developers to heavily invest in land and build apartments using debt as their means of financing.
As land is limited in supply while demand keeps increasing, the prices of real-estate kept ballooning. Generally, people view property as a safe-haven investment. However, the economic boom induced in China due to the constant development of new houses, encouraged investors to park their money in real-estate, converting houses into speculative assets.
Price bubble in the housing market over time in Shanghai, China
In 2009, when the world was recovering from the GFC, Evergrande was riding at the peak of the real-estate boom in China. Instead of repaying their borrowings, the company diversified into new businesses and even bought a sports team, Guangzhou Evergrande FC, which is among the best-known football clubs in China. The company has taken loans from about 171 banks and over 121 financial institutions. As a result, Evergrande grew to become the most indebted real-estate company. The founder Mr Hui Ka Yan became the richest Asian with a net worth of $43 billion (2017). He was also declared the 53rd richest person on Forbes Billionaires 2021 list.