A crisis emerging from Chinese real-estate giant Evergrande has spooked investors, causing huge selloffs across global markets. On Wall Street, the Dow Jones Industrial Average dropped by over 600 points (1.78 per cent) while the Nasdaq Composite fell by 2 per cent. The S&P shed 75.26 points (1.7 per cent).
Similarly, Japan’s Nikkei 225 index closed 2.2 per cent lower on Monday although Hong Kong’s Hang Seng index did show some signs of rebounding. The global rout, a Business Standard report indicates, has caused the richest 500 people to lose a combined $135 billion in a single day.
What’s responsible for the selloff?
Simply put, Evergrande Group, one of China’s largest property developers, is nearing collapse. The company was founded in 1996 and quickly grew to spearhead the Chinese property market, riding on a real-estate boom that allowed it to expand into over 280 Chinese cities.
However, as it stands, the company, reportedly, has a debt pile pegged at a staggering $300 billion including bank loans, supplier credit, and short-term borrowings. Its lenders, reportedly, have only secured a little over half of its total debt (54 per cent) as collateral.
Evergrande’s debt turned into a major issue last year when the Chinese government, as part of a broader strategy to address mountains of debt piling up in the property sector, implemented a series of measures. These, it is believed, severely hampered Evergrande’s prospects of finishing properties and selling them to fulfil its debt obligations.
The company, which employs 200,000 people and is responsible for creating over 3.8 million jobs every year, has also been the subject of massive protests over the last week. Its offices in Shenzhen have been occupied by furious investors, sales agents and contractors, each with individual bones to pick.
As such, investors have grown increasingly concerned that the massive default expected by Evergrande Group could severely dent China’s finances which, it bears mentioning, is one of the largest commodity consumers in the world.
If indeed, Evergrande collapses, there are concerns that banks, many of which would have taken a beating, will get spooked and turn away from lending (specifically to the property sector), in what will surely jeopardise China’s economic recovery from the COVID-19 pandemic. Already demand for commodities like chemicals, metals and steel have slumped.
While some have called this China’s ‘Lehman moment’ – a reference to the collapse of Lehman Brothers in 2008 which ultimately turned out to be the first domino falling in a long line that culminated in a global recession – other analysts have pointed the fact that Evergrande’s debt is not widely spread. As such, fears of contagion across lenders, they have noted, may be misplaced since systemic risks remained low. However, the true extent of the crisis is yet to be known.
The Chinese government is also in the midst of a regulatory crackdown that has seen billions shaved off some of its most profitable companies. How the Evergrande crisis dovetails with the crackdown is also only a matter of speculation but, as it stands, the short-term environment does not appear bright.
