Over the past few days, the crisis of the Evergrande Group (the second largest real estate developer in China) has emerged, which suffers from a “mountain of debts” of about $572 billion.
The Evergrande Group defaulted on $7.4 billion of bonds due next year, which sparked a financial crisis in China, and some experts described what is happening to the Chinese real estate giant as “the real estate titanic that hits a mountain of debt,” and they also warned of the consequences of the crisis on The global financial system in the coming period.
The share prices of the Chinese real estate giant “Evergrand” have fallen by about 85% since the beginning of this year until the beginning of this week, including 40% during the last five sessions.
And the collapse of the Evergrande stock came in conjunction with the accumulation of debts to nearly 572 billion dollars in loans from banks and other financial institutions, of which 240 billion dollars are due in less than one year.
The debt burden has reached $300 billion, although the value of Evergrande’s assets is $352 billion, but it is linked to 128 banks and 121 non-bank financial institutions, deepening the impact of the crisis on multiple entities.
The company’s collapse comes despite the fact that real estate investments in China increased by 15.9% during the first eight months of this year, compared to the level of a year before the Corona pandemic.
The Beginning of the Evergrande Crisis
The Evergrande debt crisis appeared since the beginning of 2018 when the company defaulted on debts of more than 4 billion dollars, then the Corona year came and the crisis exacerbated, to the extent that in late 2020 the company granted discounts on its units and real estate by about 30% in an attempt to attract customers.
It is noteworthy that the discounts of 26% offered by the Evergrande Group to boost property sales in August, failed, raising fears that the debt-laden group will default on its payments in 2022.
The group ranks as the second largest real estate developer in China, and is the second largest in the world in terms of revenue.
The Beijing government tried to control the crisis by injecting $ 14 billion into the banking system to provide liquidity, and the Evergrande Company also mortgaged some of its property and equipment to secure the repayment of part of the loans whose average interest rate was 9.02%.
Evergrande suffers from a liquidity crunch that exacerbated when customers rushed to return advances to paid reservations to the company, and the 123,000 employees protested because of the delay in payment of their salaries.
The global financial system is in danger
Analysts have warned that the imminent collapse of the Chinese real estate giant “Evergrand” will have far-reaching repercussions extending beyond China’s borders.
Mark Williams, chief economist at Capital Economics, said the Evergrande crash would be the biggest test the Chinese financial system has faced in years.
After rapidly expanding for years and capturing the asset market with the booming Chinese economy, the company is now mired in massive debt of $300 billion.
The company said last Tuesday that its real estate sales are likely to continue to decline significantly in September after falling for months, making its cash flow situation even more difficult.
Reuters said some Hong Kong banks, including HSBC and Standard Chartered, had refused to provide new loans to buyers in two unfinished housing projects at Evergrande.
Rating agencies have also repeatedly lowered the company’s ratings, citing its liquidity problems.
The group of parties affected by the company’s collapse include banks, suppliers, home buyers and investors, while Evergrande warned this week that its escalating problems could lead to greater risk of default.
Williams of “Capital Economics” explained that the banking sector will be among the first to suffer if there are any effects of the contagion of the company’s collapse on the broader real estate sector in China, adding during an interview with “CNBC”: “The banking failure caused by the collapse of major real estate developers. It is the only scenario that could lead to a sharp downturn in the Chinese economy.”
Causes of the Evergrande Crisis
Evergrande’s business has been very hectic, with rapid growth in revenues and projects, and its financial performance figures through to 2018 were more than impressive at a rate of 6.5 times compared to its share price at the start of the offering in November 2009.
Beginning in 2018, the pace of sales and operating income began to subside, in conjunction with the rise in debt expenses that came from loans signed in a period of hyperactivity, tempted by large expansions, business volumes, and demand for the company’s products, but all of this can be called “superficial” or “virtual” reasons. .
There are several reasons that contributed to this trend, the first of which is a short-term reason that occurred when Chinese regulators intervened in the real estate market in 2017 to make it difficult to build and own property regulations in real estate and housing, with the aim of cooling the hyperactivity and high prices in the Chinese real estate market in any way before the bubble burst, and indeed it succeeded Cooling process But this has happened and Evergrande is committed to short-term benefits to banks and financial institutions.
On the other hand, there is a long-term reason, which is that the one-child policy contributed to an increase in the proportion of the elderly at the expense of young people, which caused a decrease in the growth rates of the housing sector, which forced the Chinese government to terminate this policy successively in 2015 and 2019 and allow more than one child The facilitation of regulations regarding the establishment of a family of two to three children represents a major qualitative shift between restrictive and open policies with regard to population growth.
The first default came in mid-2018 for debt payments of $4.2 billion, credit rating companies began to focus and highlight their analysts and research departments on “Evergrand”, which caught the attention of those in the credit sector.
And companies began to reduce the rating of “Evergrand” again and again, and as you know, the higher the risk, the higher the interest, and the disaster will be greater if the loans are with variable interest or the company needs bank liquidity all the time, so the interest and debt expenses rise in a compounded manner and pressure on revenues.
At the end of 2020, Evergrande tried to offer attractive and attractive discounts to customers, amounting to 30% discounts on its units and properties to activate the sale again, but the pandemic problem complicated matters more and reduced the expected effect of this campaign of discounts and did not bring the desired rates on profits at the end of 2020, which was lower From 2019 and 2018 by a large distance.
The other problem is that Evergrande is indebted to about 128 banks and 121 non-bank financial institutions. The problem is so great that the Chinese Central Bank or the People’s Bank stated in its financial stability report in 2018, that the Evergrande may constitute a source of danger to the entire Chinese banking and financial system.