EVERGRANDE CRISIS

 Evergrande world's most indebted real estate firm and China's second largest property developers with$304billion liability poses currently a threat to domestic and global economy.Evergrande was started by a steel factory worker XU Jiayin in 1996 targetting millions of Chinese middle class customers ready to climb property ladder.After going public it also took control of Chinese Super League club Gwung Zhou   and renamed it as Evergrande.Evergrande has been building cities even from dirt creating jobs giving the middle class opportunity to pour their savings and enriched the local governments who sold them out.Altogether 280 cities were expanded and undertaken 1300 real estate projects.In 2017 XU Jiayin was declared as the richest man of Asia with net worth of $43 billion.

    Along with super league club company it  also invested in various fields including diary, grain,oil and attempted to manufacture electric vehicles which run into heavy losses.In November 2018 Chinese Central Bank (PBC) raised red flag and included Evergrande in the list of highly indebted conglomerates to watch flagging that a potential collapse could lead to systemic risks.In August 2020 Central Bank ordered real estate firms to follow 3 red lines 1.liability to asset ratio at 70%. 2.Net debt  to equity ratio 100% .Cash to short term debt more than 1x.If the developers failed to meet any of the 3 red lines regulators would then place limit on the extent to which they can grow debt.The central bank  also very recently injected$14 billion to the system to address liquidity concerns.State media already warned real estate firms not to expect bail outs.The rule is designed to control house prices,to manage land market,to ration credit to real estate sector and to lower cyclicity.

  According to IMF property developers had12% of Chinese corporate debt and a significant portion of foreign debt.China has already accumulated nearly$1 trillion building high speed railway tracks many of which are at loss.China being the world'second largest economy with$14.7 trillion contribute 17% of global GDP have corresponding trade and investment flows Impacting on trade and financial flows. World does not know much about health about China's financial sector which is highly risky and inter connected.

  Regulators tightened on controversial practice followed by real estate firms like taking deposits from home owners before home is completed-a major source of funding for developers.Under the new regulations local governments will set a maximum cap on deposits after inspecting the progress of projects.After the implementation of 3 red lines housing prices continued to fall, property purchase have declined steadily and consequently retail investors in wealth management products organised protests in many cities.On the contrary supplliers of materials and contracts resorted to distress sale to meet their liquidity. Evergrande even offered to repay debt in the form of property and parking spaces which was declined by Banks.Banks stopped lending to the property developer after its cash flow slow down and rating agencies downgraded.Currently regulators have asked the company to avoid default of its dollar bonds.

 Whether bailed out or not the turmoil in Evergrande is unlikely to trigger a Lehman brothers like financial crises but it could aggravate Chinese slow down.Even though Indian Iron exports to China may decline in the short run investment flows to India is bound to increase.

    

Comments

Unknown said…
Banks and financial institutions ate like people who
lemnd umbrella when the sun shinres and take bsck the same whrn rain comes. They are fair weather friends
lt is always better to think that there is a limit for everything. But when they prosper they fail to think about the limits and limitations
26 September 2021 at 01:25
Kalyani Nambiar said…
Evergande’s collapse could drag down the entire economy and its potential to grow. It can also demolish global commodities and financial markets. China’s market slowdown will definitely impact emerging markets like India’s iron export. On the contrary, this could be a benefit for India since investors may look at India as an alternative to China for investing.
26 September 2021 at 05:34
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