the project

News Reading Project

China’s Evergrande And its Impact on Global

Economy

SUBMITTEDBY: SUBMITTED TO:

RASHI MEHTA DR. SHREYA

BISWAS
PREXAKUNVER PARMAR
SHIVAM KUMAR
BHUPESH TOMAR
AMIYA TIWARI

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Table of Contents
___________________________________________________

Chapters Page No.

1 Chapter 1 Introduction 3-6
2 Chapter 2 What happened with Evergrande? 7-9

3 Chapter 3 Why is Evergrande In trouble?

4 Chapter 4 Is Evergrande Issue related with a
systematic risk?
5 Chapter 5 What impact did the evergrande disaster
have on global market and wealth?
6 Chapter 6 Why would it matter if Evergrande
Collapses?

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China’s Evergrande And its Impact on Global

Economy.

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Chapter 1

Introduction

Evergrande, which began selling bottled water in 1996 before moving on to pig
farming, now owns China's top professional soccer team (Guangzhou Football
Club, which is managed by former Real Madrid centre back Fabio Cannavaro)
and has long been the poster child for China's real estate boom. It expanded into
over 250 Chinese cities, hawking home-ownership dreams to the country's
middle class, riding on a protracted rise in property prices in China — the major
engine of post-pandemic Chinese economic expansion.
The Chinese Central Bank stated in its 2018 report on financial instability that
corporations like Evergrande might represent a systemic danger to the country's

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financial system. Evergrande has a vast network of contractors and other

companies in the area who owe the developer money.
Evergrande has exposed 128 financial institutions and 121 non-banking
businesses in recent weeks, raising the possibility of contagion.
The S&P 500 fell 2.24 percent to its lowest level since May, while the VIX, a
measure of S&P volatility, increased 26.7 percent to its highest level since May.
Concerns have also been expressed about the impact on commodities if demand
falls as a result of the construction slowdown, with metal prices decreasing
throughout Monday's trading.Despite Evergrande's efforts to rebuild faith by
promising to meet its obligations, the markets are now looking to Beijing to
prevent the issue from spreading further.China's real estate problem Evergrande
isn't the only Chinese developer in trouble. Sinic Holdings warned that it would
likely default on some of its $250 million bond payments, prompting Fitch to
downgrade Sinic Holdings' credit rating to a C, and Fantasia failed to pay $315
million in debt to lenders, including a $206 bond repayment and a $109 million
loan from Country Garden, China's second largest property developer. In late
October, Moody's downgraded seven major Chinese real estate companies,
citing weak sales and financial forecasts. China's real estate sector is above $5
trillion in debt, according to a recent prediction by Nomura Holdings.

 Evergrande is China’s second-largest real estate company.

 As the company struggled to repay creditors, global markets

responded with selloffs.

 After missing four payments, the company made a key payment to

bond holders, staving off default.

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 Questions loom about a government bailout and whether

Evergrande is in fact too big to fail.

The news that Evergrande, the world’s most indebted real estate
company, was on the brink of collapse sent global markets tumbling last
month. The company had warned investors that it could default on its
debts and ratings agency Fitch had said that default ‘appears
probable’ while Moody’s, had said ‘Evergrande is out of cash and time’.

An unexpected green shoot appeared last week in the otherwise barren

outlook for Evergrande’s debt crisis, as the real estate developer
managed to remit $83 million for a key offshore bond payment. The
company has also posted photos of construction resuming on some of
its projects in Guangdong province, which had been halted due to the
developer’s financial woes. This positive turn of events came just on the
heels of the foiled deal with Hopson Development Holdings for the rival
to buy half of Evergrande’s service unit.

What happened with Evergrande?

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Evergrande (previously Hengda Group), founded by Xu Jiayin in 1996 and

headquartered in Shenzhen, China, rapidly expanded during China’s
housing boom, buying land and delivering over 1300 market-rate and
luxury apartment developments in more than 280 cities across China.

As residential sales began to slow in recent years, Evergrande debt

increased and the company diversified into other sectors such as electric
vehicles, football and even bottled water. Evergrande employs 200,000
people directly and indirectly is responsible for an estimated 3.8 million
jobs annually.

What is the trouble at Evergrande?

The Evergrande Group is China’s second-largest real estate company in terms

of total sales and employs over 200,000 employees. Its core business deals with
buying land, developing them into houses, restaurants and so on and selling
them to interested buyers The company uses large amounts of debt from banks
and investors as well as short-term loans to fund its business. It has total
liabilities worth over $300 billion and has to pay around $37 billion in interest
and maturing debt over the next year. Its share price has dropped over 80% in
the last one year and hit a 10-year low. The company has also taken money in
advance from buyers and from its own employees but has defaulted on these
products.

Why is the company in trouble?

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Almost a third of the Chinese GDP is made up of the property sector with
Chinese authorities traditionally encouraging businesses to take on huge
amounts of debts But the recent Chinese government’s rules for property
developers called ‘three red lines” that states how much a property developer
can borrow given its financial position as measured by three debt metrics This
policy practically cut off Evergrande from taking on any more debt on its
balance sheet Some analysts argue that the company’s business model has been
unsustainable for a long time. It was said that the company held properties that
it could not sell on its balance sheet as inventory to avoid booking of losses. The
company was also accused of running a ponzi scheme as it needed constant
inflow of funds to prop up a business model that is fundamentally unsustainable
Many have called the Evergrande crisis China’s own ‘Lehman moment’ where
the failure of U.S. bank Lehman Brothers precipitated the 2008 financial crisis

A regulatory storm brewing

Government regulation in China’s property sector has been increasing as
the government has been working to control surging home prices and
excessive borrowing.

In 2020, the government imposed the ‘three red lines’ on certain

developers to help curb debt levels, forcing them to deleverage.
The three red lines policies require:

1. 70% ceiling on liabilities to assets (excluding advance proceeds from

projects sold on contract)

2. 100% cap on net debt to equity

3. Cash to short-term borrowing ratio of at least one

This resulted in Evergrande unsuccessfully trying to sell off some of its

business, evidenced by a leaked letter from Evergrande to the government
in September 2020 asking for assistance as they faced a cash crisis, which
sparked increased investor concern. An estimated two thirds of
Evergrande’s obligations are to homeowners who pre-paid for close to 1.4
million residential properties that remain undeveloped.

The government has also worked to control housing prices, which could
further impact developers’ returns and the ability to pay their debt service.
Housing is a key source of household wealth in China and if the
government succeeds in curbing residential property prices, existing
mortgage holders could lose equity in their homes. Household debt now
stands at 62% of GDP in China, which has largely been acquired through

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residential mortgages. This is one reason for such a large amount of

Evergrande debt.

The increasing regulatory environment in China could also be a deterrent to

continued foreign investment as seen recently when Blackstone
abandoned plans to acquire SOHO China due to prolonged regulatory
reviews of the deal.

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Evergrande Group and China’s Debt Challenges

Concerns about China’s high debt levels
Concerns about China’s high debt levels intensified in September 2021, when
its second-largest property developer, Evergrande Group, failed to repay its debt
obligations. The government of the People’s Republic of China (PRC or China)
seeks to reduce debt and curtail market risks among firms like Evergrande, but
defaults and a decline in property values could have broader effects. China’s
property market accounts for almost 30% of GDP, a higher percentage than in
most countries, and thus has complicated China’s efforts to reduce debt.
Property is a main source of local government revenue and a key factor in
corporate valuations and household net worth. This constrains policy options,
despite China’s leader Xi Jinping’s statements that support reducing debt and
inequality. Declining land revenue could affect local governments’ ability to
repay loans and special bonds, which Nomura Holdings estimates reached
almost $7 trillion (44% of China’s GDP) in 2020. China relies on debt-financed
fixed asset investment (including property) and exports for growth. Supply
disruptions, energy and commodity shortages, and industrial and property
overcapacity are most likely exacerbating economic risks. The situation
highlights potential broader and longer-term risks in China’s economy that
Congress may consider as U.S. financial firms seek to expand their exposure to
China.

Evergrande Group

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Evergrande Group is a state-tied property conglomerate based in Shenzhen that

also operates energy, entertainment, health, insurance, and technology
businesses. The firm was founded in 1996 when the government was
liberalizing investment in the property sector. Tax reforms in 1994 had shifted a
significant amount of local revenue flows to the central government, prompting
local governments to turn to property sales and bond issuances for new revenue
streams. This shift increased the importance of land sales, real estate
transactions, and property values to local governments. The Shenzhen
government is a large shareholder in Evergrande. In 2017, Evergrande moved
its real estate assets into the Hengda Real Estate firm, with plans (later deferred)
to list Hengda on the Shenzhen Stock Exchange through a reverse takeover of
Shenzhen Real Estate, a Shenzhen government firm. Hengda sold 25% of its
shares to the Shenzhen government and other state investors. Evergrande is also
tied to the central government. The Ministry of Finance’s CITIC Group is a
shareholder. Moreover, in 2018, Evergrande signed a $16 billion agreement
with the central government’s China Academy of Science to invest in priority
emerging technologies on its behalf. Evergrande has acquired firms that
produce electric vehicles in the United States, the UK, and Sweden, and has
invested in biotechnology research at Harvard University.

Evergrande and China’s Debt Evergrande owes about $305 billion in debt (2%
of China’s GDP). The firm is obligated to repay $124 billion this year—
including $19.3 billion in bonds—but may only have 10% of this amount in
cash on hand. The firm is said to owe money to 171 domestic banks and 121
financial firms. Offbook liabilities have not been disclosed. As China’s largest
issuer of high-yield dollar denominated debt, Evergrande was an attractive
investment, despite known risks, because it paid annual interest rates of 7.5% to
14%. China’s total debt—household, corporate, and government—reached
290% of GDP in 2020 (Figure 1), with the majority of debt held by companies.
China has an estimated $100 billion in U.S. dollar-denominated debt due in
2021. Within China, PRC firms owe an estimated $706 billion in 2021.

Evergrande: How much risk is Beijing willing to accept in its

financial market?
Huachen Automotive was forced into bankruptcy. Huarong Asset Management,
on the other hand, was rescued. HNA has to go through a painful restructuring.
And Evergrande? The decisions to rescue or restructure ailing companies
expose Beijing’s strategy towards financial market risks. The dilemma faced by

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Chinese planners is strikingly similar to that faced by regulators in Western

countries.

No one can say that China is casting too wide a safety net in the crisis. In the
first half of the year alone, dozens of large companies went bankrupt, leaving a
combined €15 billion of debt. So the financial regulator and the central bank are
certainly showing the strength to go bust. In a state economy, the government
has the ability to rescue just about anything that runs into trouble. But it is
holding back on interventions. At the same time, however, the slow demise of
real estate developer Evergrande has observers and market participants puzzled.
How much actual risk does Beijing dare to take? On the one hand, China’s CP
has repeatedly announced its intention to increasingly rely on market forces in
the financial sector. “We will speed up the development of a multilevel capital
market,” Premier Li Keqiang said in 2014, “and develop a well-regulated bond
market.” On the one hand, a well-functioning bond market also requires real
default risks. But too much depends on the fate of the Evergrande Group. From
simple homebuyers to major banks, a wide variety of players are involved. In
addition, there are systemic risks in China’s over-indebted real estate sector.
Other companies in the sector are already having a hard time restructuring their
bonds. Beijing thus faces a dilemma between maintaining the stability it prides
itself on and creating a functioning bond market. In a self-sustaining capital
market, however, investors must also share the risks of large institutions. The
leadership is aware of this, and so it is quite willing to let market forces prevail
and give investors the benefit of the doubt if they have made the wrong bet.

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How much risk can socialism take?

However, these should not be too large, as a series of recent bailouts have
shown. Huarong Asset Management was rescued in spring for €6.5 billion. The
procedure used was quite conventional. State banks took over Huarong’s debts.
Meanwhile, the HNA conglomerate, which is also over-indebted, is going
through a tough restructuring that recognizes the group’s remaining value
(China.Table reported). Beijing is clearly trying to steer a middle course here,
moving ever closer to the use of market forces. It is clear that neither of the
extremes on the spectrum of financial market systems is an option for China.
These two extremes would represent a perfect market economy on one end and
pure socialism without a capital market on the other. In a perfect market
economy, there are no bailouts. Those who fail simply cannot repay their debts.
Market participants then have to accept the loss of their investment.
Accordingly, they will invest their capital carefully and wisely. They would
only entrust it to adequate companies. In pure socialism, on the other hand,
there are no business risks. But the available resources are poorly used.
Inefficiency, failure, laziness, bad decisions – all this is quite trivial to a proper
state enterprise. It just continues its business after a slap on the wrist for failing
to meet the plan.

Beijing seeks a middle way

China is now coming from the second model and, after decades of reforms, has
reached a point where the positive effects of the first model are becoming
apparent. However, these positive effects require the state to not always step
into the breach when things get tough. This requires a lot of discipline. Even
democratic politicians in a social market economy like to be celebrated for
bailouts, even if they make no economic sense. When the consequential damage
of loan default is catastrophic, the measures generally find a lot of approval.
Especially when there is a threat of a domino effect across the financial and real
economy. In the Evergrande case, it will now be exciting to see the Chinese
government’s reaction. After all, the government caused the real estate sector to
slide in the first place by imposing new capital requirements with its “three red
lines“. But in any case, it is safe to assume that it will not allow a catastrophic
bankruptcy. Instead, it will isolate the real estate market and the financial
system from a possible implosion of Evergrande. Because uncontrolled
insolvency would put three policy goals at risk at once: The well-being of
Chinese real estate buyers, the construction of new housing, and the
international reputation of the Chinese economy.

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The risks of a fully comprehensive financial system

When the US bank Lehman Brothers had filed for bankruptcy 13 years ago,
China was almost gloating. Its financial sector did not produce such hidden
systemic risks because it was simpler. Above all, Beijing succeeded with state
intervention in raising growth to a record in absolute terms in the crisis year.
This was supposed to prove the superiority of its economic model. State leader
Xi Jinping will therefore now avoid Evergrande bankruptcy with its farreaching
systemic consequences – no matter the cost. Instead of rescuing the company in
its existing form, for example, it would be possible for state banks to take over
the real estate portfolio, including the debts. However, the costs of doing so
would be higher than the mere price of the solution. After all, even if bank
insolvency has been a possibility from time to time recently, investors continue

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to rely on government bailouts. But a credible bond market requires risk. If the
state is ultimately liable for everything, then investors will only ever receive
minimal interest when they lend money to companies. Interest is also
compensation for risk, after all. Without risks, there are no particularly high-
interest rate opportunities. Moreover, in a fully insured financial system,
investors do not bother to allocate their money only to trustworthy companies.
The effort to identify good and bad business models loses its value. So without
default risk, the market’s monitoring function also dwindles.

A healthy bond market relieves the burden on supervisors

However, the communist government wants to strengthen the advantages of a
functioning financial market so that it does not have to continue to supervise
everything by hand. The central bank and supervisory authorities still supervise
the financial system in far too great detail. In a half-privatized economy with a
volume of ten trillion euros, however, this micromanagement has actually
become impossible. So China would have an interest in letting market forces
take the helm. But the leadership has so far failed to really let go. Indeed,
Europe and the US face similar problems today, and Japan has been wrestling
with them since the 1990s. Economists generally see a crisis in the credit
system. The independent economist Richard Duncan even diagnoses a
fundamental crisis in the capitalist system. Above all, it should at least be able
to do one thing: Direct capital to the most economically promising channels.
However, interest rates have been ultra-low for over a decade. Duncan notes
that capitalism, in which money should normally be scarce and precious, has
been replaced by “creditism,” creating growth through ever-increasing lending.
To a good extent, it doesn’t matter here where the capital goes. It hardly yields
any interest in the bond market anyway. The stock market and the real estate
market, on the other hand, are being flooded by a large amount of capital.
Evergrande has also benefited from the effect of the latter. Chinese capitalism is
also more of a creditism with Chinese characteristics. Money has always been
plentiful. Abundant financing is the foundation of its growth model. True, the
government has tried to route funds into sensible channels and placed dams
throughout the economy. But in the end, capital in China actually always ends
up in the real estate market. Profits in this segment were fantastic and appeared
safe. And Evergrande has presented itself accordingly. Talks with investors now
confirm the initial expectation that Beijing would by no means allow for such a
company to fail. (China.Table reported).

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The house of cards had to collapse

The important thing is now to let Evergrande’s financial house of cards

collapse. Otherwise, the Chinese bond market has no chance of ever credibly
reflecting risk. Moreover, a collapse of Evergrande fits the current course of
putting heavyweight private entrepreneurs in their place. However, Chinese
economic planners have now come up with a thoroughly practical strategy to
limit the impact of mega-bankruptcy. Evergrande itself may well collapse. But
it wants to erect walls around the heart of the problems. By injecting capital at
the crucial cornerstones, it aims to prevent the problems from spreading to other
companies. To use a pandemic analogy, it wants to isolate the infected

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Evergrande Group to prevent further contagions. Some large investors will have
to bear losses, while apartment buyers are to be protected from the
consequential damage. The first effects of the insolvencies that China is
allowing and even bringing about are already apparent in the bond market. With
a risk return, both yield and interest rate are rising. Yields are rising while rates
in the market are falling – these two metrics are behaving in opposite ways for
bonds. Interest rates are rising because investors are taking on larger risks by
taking higher markups. But that also means that investing in bonds will become
more profitable again in the future and that they will return as an option for
investors. And even if an uncontrolled bankruptcy of Evergrande would be
catastrophic and will be prevented: Allowing moderate risks could continue to
pay off for Beijing.

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What does Evergrande Do?

Businessman Hui Ka Yan founded Evergrande, formerly known as the
Hengda Group, in 1996 in Guangzhou, southern China.
Evergrande Real Estate currently owns more than 1,300 projects in more than
280 cities across China.
The broader Evergrande Group now encompasses far more than just real
estate development.
Its businesses range from wealth management, making electric cars and food
and drink manufacturing. It even owns one of country's biggest football teams
- Guangzhou FC.
Mr Hui was once Asia's richest person and, despite seeing his wealth plummet
in recent months, has a personal fortune of more than $10bn (£7.3bn),
according to Forbes.

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Why is Evergrande in trouble?

Evergrande expanded aggressively to become one of China's biggest
companies by borrowing more than $300bn.
Last year, Beijing brought in new rules to control the amount owed by big real
estate developers.
The new measures led Evergrande to offer its properties at major discounts to
ensure money was coming in to keep the business afloat.
Now, it is struggling to meet the interest payments on its debts.
This uncertainty has seen Evergrande's share price tumble by almost 90%
over the last year.

Why would it matter if Evergrande collapses?

There are several reasons why Evergrande's problems are serious.

Firstly, many people bought property from Evergrande even before building
work began. They have paid deposits and could potentially lose that money if
it goes bust.
There are also the companies that do business with Evergrande. Firms
including construction and design firms and materials suppliers are at risk of
incurring major losses, which could force them into bankruptcy.
The third is the potential impact on China's financial system: If Evergrande
defaults, banks and other lenders may be forced to lend less.
This could lead to what is known as a credit crunch, when companies struggle
to borrow money at affordable rates.

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A credit crunch would be very bad news for the world's second largest
economy, because companies that can't borrow find it difficult to grow, and in
some cases are unable to continue operating.
This may also unnerve foreign investors, who could see China as a less
attractive place to put their money.

EFFECTS OF CHINA’S EVERGRANDE:

Affect’s on India
The world could be in the midst of a new full-blown financial crisis, and this
one, is made in China. 
In the past couple of days, global financial markets have been roiled by the
implosion of China’s second-biggest real estate company Evergrande, which till
recently was considered too big to fail. 

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Emerging markets including India, too, have been at the receiving end of the
mini-market meltdown of sorts, with the BSE Sensex taking a 525-point tumble
on Monday and down by another 215 points by noon on Tuesday before
recovering most of the losses.
The Sensex’s fall was in line with the losses in global markets. The S&P 500
Index closed 1.7% in the red, the Dow was down 1.78% and the Nasdaq
Composite shed more than 2.1% on Monday. 

What is the Evergrande debt crisis all about?

Evergrande is China’s second-largest real estate company, and it owes a lot of

money to its creditors—more than $300 billion to be precise. To be sure, most
immediately, it needs to pay $8.5 billion in interest playouts, by Thursday,
although it does have a 30-day grace period in which to do that. 
While there is nothing unusual about big companies owing big monies to
creditors, Evergrande has no money left to pay and is set to default on its bond
payments. 
This, as many analysts now say, had been the non-COVID, non-inflation risk
that had been hiding in the shadows all along, which many people saw but
either chose to ignore or did not talk about as loudly as they should have. 

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On September 16, Evergrande suspended trading on its onshore bonds after a

ratings downgrade. 

Just how big is Evergrande? 

Very big. It owns more than 1,300 projects across 280 Chinese cities and towns
and singularly controls 2% of the country’s real estate market. As many as 1.5
million people in China are reportedly waiting for their homes to be delivered.
This is an inventory worth a staggering $1 trillion. 

So, who holds Evergrande’s bonds?

Evergrande’s bonds are held in passive exchange-traded funds (ETFs) across
emerging markets. They are also held by several US and European money
management companies that hold them in separate accounts. 
Some marquee money managers that have a significant exposure to
Evergrande’s bonds are the Zurich-based UBS Group, New York’s BlackRock
and London-based HSBC Holdings and Ashmore Group, which have all taken a
tumble on the stock markets. Fidelity, PIMCO and Goldman Sachs also have
significant exposure to the company’s debt.
These investors were attracted by the high positive bond yields being offered by
the Chinese real estate companies on their debt instruments, when most of the
rest of the geographies and sectors across the world are offering negative yields,
with bonds worth more than $165 trillion reportedly in negative yield territory.  

Can this contagion spread?

It can, and perhaps will, if the Chinese authorities do nothing about it. Global
markets are waiting for the Chinese central bank to inject some liquidity, to
effectively bail the real estate giant out, at least for now.
The real estate industry makes up for nearly 29% of the Chinese economic
output. If Evergrande goes down, it could exacerbate a slowdown in the
country’s residential property market, which was down by 20% in August from
last year.
In fact, China is currently sitting on an unsold inventory of 60-65 million
residential units.  

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How has it impacted Indian companies? 

Stocks of several top Indian steel, mining and chemical companies including
some of the index’s best-performing stocks like Tata Steel, Jindal Steel, SAIL,
JSW Steel, Tata Chemicals, NMDC and DCW have gone down by 10-15% in
the last five trading sessions. 
All these companies would have had receivables from or linked to the Chinese
real estate firm. This could now be in jeopardy, if Evergrande goes down. 
Commodity exporting companies will continue to take a hit if this crisis is not
sorted out in time and if the contagion does indeed spread.

Evergrande, a Chinese real estate developer, has recently reported a

debt crisis that is creating noise all around the world. The company is
now being termed as one of the most indebted real estate developers in
the whole world. Given the 2008 recession also began with a real estate
crisis in the US, many feared similar repercussions this time. 
Let’s understand more about the Evergrande crisis, and if this will impact
the Indian market.

Why is it in the news now?

Evergrande is a real estate developer based out of China. It began

operations in 1996 and expanded its operations across the country
mostly by borrowing. Earlier in September 2021, the company hinted to

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the markets that it will default on interest payments worth $80 million
around September 23, 2021. There are various reports which claim that
the Chinese government has not shown any intent (at least publicly) to
rescue the company. Banks too have stopped lending to the company. 
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Currently, Evergrande has more than $300 billion worth of liabilities lying
with banks.  Evergrande has unfinished projects worth over $1 trillion
and almost 1.5 million people are waiting for delivery of their homes. The
company has more than 1,300 projects in around 300 cities in the
country. A default in the company will impact  China domestically
because Evergrande has about 2 trillion yuan worth of assets, which is
equivalent to almost 2% of China’s GDP. 
Since China is considered to be the second-largest economy globally, if
one of its biggest real estate companies defaults, it may have
repercussions on the global demand and supply of various commodities.

How big is the crisis globally?

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The extent of global damage depends on the exposure of the company

to the offshore bond market. Out of the total offshore debt of China,
which is close to $19 billion, Evergrande has a whopping 9% exposure.
Most of the Evergrande bonds provided high positive yields which put
the global high yield bond market under a lot of pressure as well. The
reason being, global investors like BlackRock, Paris-based Amundi, UBS
Asset Management, Fidelity, HSBC Holdings, PIMCO, Ashmore Group,
Goldman Sachs Asset Management are the few of the largest
bondholders of Evergrande.
Barring the company’s exposure in the offshore bond market, its network
of debt is also widespread. The liabilities of the company are spread
across 128 banks and 120 other types of institutions. A failure in such a
large network is bound to cause a lot of trouble.

 There are two sides emerging when it comes to the impact of the whole

crisis on India. One side speaks about the negative impact.

 Commodity exporting companies in India will face the axe if China faces

an economic slowdown. In case the Yuan depreciates during a Chinese

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slowdown, we will face intense competition from Chinese companies in

exports.

 If the currency of a country depreciates, exports become cheaper.

Hence, Indian commodity exports companies will face intense export

competition.

 According to an S&P report, Evergrande will have over 240 billion yuan

($37.16 billion) of bills and trade payables from contractors to settle over

the next 12 months. 

 As mentioned before, banks and global financial institutions have

exposure to the company’s bonds but banks may also have exposure to

such contractors and suppliers of the company.

 According to another report by Fitch, trade payables stood at 667 billion

Chinese Yuan as of now. Hence a default of this magnitude can have

serious repercussions.
However, a fraction of the market also believes that this might be good
for us in the long term. Multiple events that have happened in the recent
past including the Trump-Xi war and the coronavirus pandemic have
triggered global companies to look for China alternatives. This has
benefited India in many ways and will continue to do so in the future. We
already know that Apple has solid plans to set up a plant in Tamil Nadu.
In the near term, India might witness fund outflows, but in the long term it
might turn out to be good for India as more global manufacturers are
looking for alternatives to China.

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Affect’s on China

There are a lot of possibilities about how the restructuring of

property development giant, Evergrande, could turn out.
Restructure?
The central government has already sent a team to help Evergrande
restructure. But this will not be a simple task. Evergrande is not a simple
corporate.
The complexities include a bank located in Shandong, under a
subsidiary of Evergrande. China's authorities will need to look at how

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this bank is related to other financial institutions to avoid a liquidity

crunch in Shandong and among smaller banks. 
Then there is a pharmaceutical company, and an expressway
company that Evergrande has invested in, which are also located in
Shandong.
The scale of any restructuring and the problems Evergrande is facing
From Evergrande's semi-annual report of 2021, total assets as of June
2021 were around 2.2% of China’s nominal GDP.  But there could be
indirect factors that we should also take into account. 
The current focus is mostly on the wealth management products issued
by a subsidiary of Evergrande. Some senior management members had
redeemed these products early, which triggered anger amongst other
investors. Most of them are staff of Evergrande and their friends and
families. Three solutions have been given by Evergrande to these
investors. One is that redemption repayments will be made in the form of
Evergrande apartments (though these could still be under construction).
But the wealth management product incident is not at the core of
Evergrande's problem.
The more troublesome issue is the bank invested in by Evergrande. Did
it also lend to Evergrande? Did it have exposure to other businesses that
lent to or did business with Evergrande? Which other banks do business
with this bank and what are their exposures? These are the questions to
which we do not have answers. But they relate to the interlinkage
problem noted in an opinion piece we also published today. 
Capital needs
The main problem for Evergrande currently is that it does not have
enough money to complete the construction of existing residential
property projects. That means it cannot sell these properties and so
cannot get cash to repay its debts. 
We expect that the government's restructuring team will help Evergrande
at least get some capital, but it may have to sell some stakes to a third
party, such as an SOE (state-owned enterprise). It could then continue
to operate.
The spin-off of non-core businesses, for example, those that are not
residential real estate type businesses, will probably be done first. After
that could come sales of stakes that are at the core of Evergrande's
business.

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How much of a stake would be sold is a big question. Evergrande's

current bond yields imply a very low value for the company. So the stake
could be sizeable. We don't, however, think it is inevitable that
Evergrande will be bought out by an SOE and become an SOE itself.
The only comment we feel we can make with some degree of certainty is that the
process of restructuring will likely be drawn out. We don't anticipate a full and
complete answer to the current market anxiety any time soon. 

Yuan under pressure

We expect USD/CNH will jump to near 6.50 during the national holidays. Then
hopefully there will be some information on restructuring in November that may bring
some comfort to markets.
Our year-end USD/CNY forecast is still at 6.70.

How will the Evergrande collapse affect crypto?

The global financial system is facing one of its worst crises in recent years. The
market is closely following the situation at Evergrande and how it will impact the
economy. Evergrande, one of the largest Chinese companies, has been staving off
default fears for the past months, having recently made two crucial interest payments
on October 23rd and October 29th. If unresolved, it will become one of the largest

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debt faulting in the world and would have massive ramifications in the global
economy. Beijing does not seem willing to bail out the company, it is however likely
looking for damage limitation.  
Given that crypto has become a major part of the global economy, it’s also worth
noting what the Evergrande collapse means for the cryptocurrency ecosystem.

The Chinese Real Estate Company Struggles 

Evergrande was founded in 1996 by Chinese businessman, Hui Ka Yan, in

Guangzhou, China. The company has grown over the years to own more than
1300 projects in over 280 cities across China.
Even though it started primarily as a real estate company, Evergrande has been
on an expansion spree over the years that cut across various industries. Among
its engagements are water bottling plants, wealth management, food production,
electric vehicle production and a football team.
The growth of the company coincided with the company founder’s fortune, who
at one point was the richest man in China. However, this has dwindled in recent
months, just like the company. 
Evergrande now finds itself in trouble due to unmanageable debt. The
aggressive expansion by the company was built on top of massive borrowing
which totalled over $300 billion. The money came from 171 domestic banks
and 121 other financial institutions. It was all good until Beijing introduced a
regulation that capped the debt any real estate company could hold. Evergrande
had to sell some of its properties at big discounts to ensure a flow of income.
However, it is now struggling to keep afloat. The Evergrande Group had to
suspend its share from trading on October 4. By then it was hoping that the real
estate firm Hopson Development would purchase 51% of the shares of its
property unit. Both companies had to halt share trading for two weeks while
finalising the deal. However, the deal with Hopson Development fell through
and both companies resumed share trading. 
It was not the best look, as Evergrande shares on the Hong Kong Stock
Exchange fell by more than 14%. Even though the company looks to stabilize
and avoid further falls, it is still struggling as investors are becoming
concerned. 
At the moment, the company’s founder has said the company is looking for
ways to negotiate for renewal or extension of its borrowing and other
agreements with the debtors. However, there is no guarantee that the company
will meet all its financial obligations in line with the new regulations. 

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Why do Evergrande struggles matter inside and out of

China?
At first glance, it might seem like the Evergrande struggle is all about the company
and nothing more. However, there is more to it. First, China is one of the world’s
leading economies and Evergrande is one of the biggest companies in the Chinese
economy. The fallout on the Evergrande books will have bigger micro and
macroeconomic implications.
The first of the implications from the Evergrande fall would be the investors. Most
people have placed their money on Evergrande through their real estate business.
These people were purchasing housing units off plans, meaning they paid before the
buildings were put up. They will have little recourse to claim their money.
The fall of Evergrande also has a massive impact on the international supply chain. As
one of the biggest companies in the world, Evergrande has multiple international
suppliers, design firms, construction and other partnering businesses. All risk losing
money if Evergrande defaults on its payments.
The major impact is on the financial implications. With the national banks and other
financial institutions being Evergrande’s main source of debt, the financial fallout
from Evergrande would be far-reaching. 
With many banks facing the risk of losing money, it might lead to a credit crunch.
This is a case where the banks have to limit the amounts of money they can give out
as loans. It means, most companies risk not having enough money. This would mean
slow economic growth rates for China which would also have a reflexive effect on the
global economy. 
At the moment that company has ceded that there’s no guarantee that it will be in a
position to honour all its financial obligations. 

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Can the Evergrande situation be salvaged?

At the moment, it seems dire for Evergrande. It has already been struggling to
make payments to investors of its wealth management and bonds products. It
has also missed interest payments to various international investors twice in
September. 
On the share performance, the company share value has dropped more than
60% in the past 6 months. Already the effects can be felt on the Hang Seng
Index, a Chinese company tracking index, which has fallen by 3.3% in its
biggest decline since July. This shows the impact is more than just on the
Evergrande itself.
However, given the possible effect on the Chinese economy, there is the thought
that the government could step in to help the company from falling, and creating
massive supply chain disruption. 
However, that yet is not an official stance of the state. Some of the people
believe that the government must not step in to bail out the company. That by
helping one of the biggest companies in the country it would be setting a bad
precedent. 
Whether Evergrande can regain its financial standing depends on various
government policies and any strategic partnerships.

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For a long time, the crypto market operated independently from the other
traditional stock exchanges. Bitcoin is likely to replace gold as a safe
haven given its resilience in the face of economic turmoil. This came to light
following the spreading coronavirus. In the early coronavirus stages, it seemed
as though the crypto market was correlated to the traditional stock market. By
then Bitcoin had declined to around $4000 by March 2020.
However, as the economy was almost coming to a standstill, Bitcoin and the
entire crypto market launched a bullish run. The run was sustained for more
than a year as Bitcoin passed its all-time high records to hit around $65,000 by
July 2021.
This bullish run of the crypto market while the stock market also rebounded,
showed correlation between the two asset classes. It also hints at how the
Evergrande fallout could affect crypto. During the crypto markets Bull Run, the
number of players and investors increased and the acceptance of
cryptocurrencies as an asset class became widespread.
Cryptocurrency exchanges also became more prominent as more people were
looking to trade crypto assets. Even derivatives like Bitcoin and Ethereum
futures were now mainstream. Which led to the crypto adoption by traditional
financial institutions.
The entry of institutional investors into crypto is one of the reasons for
increased crypto regulations and mainstream adoption. However, with the
economy getting hit by the Evergrande fall, most of these institutions will suffer
as well. This would mean decreased investments in crypto or withdrawal of
money as banks will be limiting the loans due to a potential credit crunch.
As a decentralised market, the crypto market depends on demand and supply for
value. A withdrawal of money from crypto investments would mean less
demand, and with the same supply in place, most of the tokens would lose
value. Therefore, if you have been wondering if Bitcoin is recession proof, you
should know it is not yet. 
There have also been concerns about the possibility of Evergrande owning some
debt in the form of crypto. The stablecoin supplier, Tether, in particular, has
been rumoured to be owed money by Evergrande. However, the company has
since come out to clarify that it has no relations with Evergrande. Still, given

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that Tether never opens its financial books for public scrutiny, anything is
possible. With the lack of transparency, there is always the concern of will
crypto crash? 
The crypto market developed to act as an alternative to the traditional economy.
It was meant not to have any correlation to it. However, over time the economy
has evolved making the crypto market a bigger player. Therefore, any massive
changes like the Evergrande fall is a concern. How the crypto market reacts to
an Evergrande default will give investors greater insight into what drives the
crypto valuations.

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What impact did the Evergrande disaster have on global

markets and wealth?

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There was a big selloff on Monday, with key Asian and European markets
falling dramatically. The world's wealthiest 500 persons lost a total of $135
billion as a result of the worldwide stock market meltdown, according to
Bloomberg.
Elon Musk's net worth plunged $7.2 billion to $198 billion on Monday,
according to the Bloomberg Billionaires Index, while Jeff Bezos, the founder of
Seattle-based Amazon.com, lost $5.6 billion to $194.2 billion.
Hui Ka Yan, Evergrande's founder and Chairman, has slipped significantly in
Bloomberg's wealth rankings, with his fortune now valued at $7.3 billion, down
from $42 billion in 2017.
The metals sector in India's stock markets plummeted on Monday after rising
since the start of the year, indicating that it had become overheated.
Analysts believe this is a temporary reversal, but if the Chinese issue continues,
it might have long-term implications.

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India's robust iron ore exports, much of which is intended for China, may suffer
if China's twin difficulties cause a sustained drop in the country's real estate
industry.
And this is likely to have a long-term impact on global economic prospects,
hurting the fragile recovery in nations like India.

Evergrande's difficulties are critical for a number of reasons.

To begin with, many people purchased property from Evergrande before
construction began. They have made deposits and may lose their funds if the
company fails.

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Companies that conduct business with Evergrande are also present.

Construction and design firms, as well as material suppliers, are at risk of
suffering significant losses, which could lead them to file for bankruptcy.
The final point to consider is the possible impact on China's financial system.
"The financial ramifications would be enormous. Evergrande is said to owe
money to 171 local banks and 121 other financial institutions "Mattie Bekink of
the Economist Intelligence Unit (EIU) informed the BBC.
Banks and other lenders may be pushed to lend less if Evergrande fails.
This could result in a credit crunch, in which businesses are unable to borrow
money at reasonable rates.
A credit crunch would be disastrous for the world's second largest economy, as
businesses that are unable to borrow find it difficult to expand and, in some
cases, cease to exist.
This may frighten international investors, who may regard China as a less
appealing place to invest.
In its zenith a decade ago, Evergrande sold bottled water, owned China's best
professional soccer team, and even dabbled in pig farming. It has become so
enormous and wide that it now has an electric vehicle business, but mass
manufacturing has been delayed.
Evergrande is currently considered a weak danger to China's top banks.
The company, founded in 1996, profited from China's great property boom,
which urbanized vast parts of the country and resulted in homes accounting for
about three-quarters of all family wealth. This put Evergrande at the epicenter
of power in an economy that had grown to rely on the real estate industry for
rapid growth.

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Evergrande technically defaulted, forcing HSBC and

other international banks to write off 197 billion US
dollars

Berlin, Germany): For the second time in a week, China Evergrande

Group has apparently technically defaulted on interest payments to
international investors. This further manifests the bankruptcy of the real
estate developer. The real estate group has accumulated a mountain of
debt totaling $305 billion. In the eight weeks to the end of the year alone,
nearly $338 million in interest will be due. Should the Evergrande
insolvency not only drag down China's real estate sector, but the entire
economy of the country, we will see even bankruptcies of major
international banks - such as HSBC, fears DMSA senior analyst Dr.
Marco Metzler.

Today, the grace period for overdue interest of $47.5 million on an off-
shore bond issued by the second largest real estate developer in China
ended. But there has been no official confirmation of any payment of that
interest by the close of business at Hong Kong banks. There are only
unconfirmed media reports about an interest payment that is said to
have been instructed today. However, Evergrande has not officially
confirmed this payment yet. No wonder, for example, that a
recent report in the Financial Times today doubts that the

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money has actually paid to creditors. "This is basically the

same game as a week ago," notes DMSA senior analyst Dr.
Marco Metzler.
Even for the overdue interest payment on October 23 in the volume of
about $83 million, there is still no official confirmation from investors.
"Even our inquiries to affected investors since then did not bring any
confirmation for the interest receipt," explains DMSA senior analyst Dr.
Marco Metzler. (Note to editors: See also our press release of
25.10.2021) "Thus, the bankruptcy has apparently already technically
occurred," analyzes Metzler. The developer had already previously given
no more information on whether it can still avoid a payment default.
Efforts to raise further capital have also largely failed. For example, the
plan to sell a majority stake in its real estate management subsidiary.

Behind the scenes, negotiations were hectic until the very end.
According to news agency Bloomberg, Evergrande representatives met
with affected bond investors in New York at 4 p.m. local time on Oct. 28.
In the talks, institutional creditors requested information on the status of
real estate projects, liquidity and asset valuations, informed sources
said. The meeting ended without an official result, but with a commitment
to make interest payments. The result was published by the New York
Times still yesterday and taken up by the media as if the payments had
already been made. However, this is not the case so far.

The developer defaulted on three coupon payment rounds in September

and October totaling nearly $280 million. However, a 30-day grace
period is still running in some cases. Between Nov. 1 and Dec. 28, a
total of coupon payments on offshore bonds with an interest volume of
nearly $338 million are now due.

In Dr. Metzler's view, the Evergrande case also throws a spotlight on

Beijing: "The Chinese state is clearly not interested in bailing out for the
international debts of Chinese corporations." He says this is evidenced,
for example, by the fact that China's financial market regulator
summoned all property developers to a meeting this week and called on
them to repay their international debts themselves.

And that's where things come in: A study by rating agency Standard &
Poor's dated Oct. 27, 2021, shows that China's real estate developers
alone are due to redeem paper with a face value of $40 billion by the
end of the year. According to a study by Goldman Sachs, the foreign
debts of Chinese real estate developers total around 197 billion US dollars.

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"Given such volumes and the low creditworthiness of many Chinese real
estate developers, it is to be expected that interest and redemption of
the international bonds issued by Chinese real estate developers will
almost completely default," warns Metzler. "Especially since there are
hardly any possibilities to collect the debts in China."

It is true that an agreement between Beijing and Hong Kong (Mutual

recognition and assistance to insolvency proceedings) has been in place
since May 14, 2021, which is intended to make it easier for foreign
creditors to enforce their asset claims even in China itself when Hong
Kong companies - like Evergrande - stumble. However, doubts are now
growing as to whether this bilateral framework is sufficient to protect the
claims of institutional foreign creditors in the case of Evergrande, whose
holding company is incorporated in the Cayman Islands .

"The Evergrande bankruptcy case is extremely complex with domiciliary

company in Cayman Islands as holding company and assets in China. In
the end, there will be little to nothing left for bondholders," predicts
DMSA expert Dr. Metzler, referring to his former employer, rating agency
Fitch, which had already downgraded the group's credit rating to C at the
end of September, assigning a recovery rating of RR6 for outstanding

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bonds. Fitch therefore assumes that in the event of Evergrande's

bankruptcy, only zero to ten percent of the capital invested by bond
investors would be returned to them. Assuming an average return of five
percent, international investors would have to immediately write off
around $22.5 billion in the event of an Evergrande insolvency, as Metzler
demonstrated in detail in its study "The Great Reset - Evergrande and
the Final Meltdown of the Global Financial System" dated Oct. 24, 2021.

(Note to editors: This study also includes a list of Evergrande's

international creditors along with the amount of outstanding principal).

But it may not stop at $22.5 billion in write-downs. In the meantime,

DMSA senior analyst Metzler considers it quite possible that Evergrande
could drag China's entire real estate sector down with it. This could have
serious implications for major international banks such as HSBC.
According to their figures for the third quarter of 2021, Hong Kong's
largest bank alone has extended loans totaling 19.6 billion U.S. dollars
to Chinese real estate groups. Assuming a recovery rate of five percent
in the event of an industry-wide wave of bankruptcies triggered by
Evergrande, HSBC alone would have to write off around USD 18 billion.

If one also considers the limited possibilities of international banks to

access assets in China (see above), there is much more at stake for
HSBC: the default of the entire portfolio of Chinese corporate loans. And
that, after all, is worth around $196 billion. "Such immense lending to
Chinese companies, without a guaranteed possibility of accessing
collateral in China itself in the event of bankruptcy, is irresponsible in my
view," says financial expert Metzler. With a return of five percent, HSBC
would have to write off around 186 billion dollars in this case. That would
correspond to almost the entire equity capital of the bank. And would
probably lead immediately to its bankruptcy. This would make HSBC a
victim of the Chinese financial virus, which would then spread rapidly
throughout the international financial markets. "The Great Reset - the
final meltdown of the current global financial system - has long since
ceased to be a purely intellectual thought experiment," concludes DR.
Metzler.

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China increases efforts to contain Evergrande crisis and not save

it

As China Evergrande Group edges closer to a massive restructuring,

Beijing has stepped up efforts to limit the fallout, signalling it’s willing to
prop up healthy developers, homeowners and the real estate market at
the expense of global bondholders.

In the last week alone, Chinese authorities have dispatched top

financial regulators to nudge the country’s massive banks to ease
credit for homebuyers and support the property sector. They also
bought out part of Evergrande’s stake in a struggling bank to limit
contagion. The central bank meanwhile has pumped 790 billion yuan
($123bn) into the financial system over 10 days to ease liquidity.

The moves underscore that China will do everything it can to ring-

fence Evergrande, while showing little interest in a direct bailout of the
developer that has roiled global markets for weeks. That doesn’t bode
well for bondholders – both onshore and abroad – looking for some
kind of rescue from the Chinese government.

“The first obligation is going to make sure that homeowners who

bought those homes take delivery and are made whole,” said Marathon
Asset Management chief executive Bruce Richards, who started
buying Evergrande debt last week.

“At the very end of the pecking order are offshore bondholders.”

For China, the risk of contagion far outweighs any potential damage
from an Evergrande collapse on its own. Though Evergrande is one of
the largest developers in China , it accounts for just 4 per cent of sales
in the country. A run on property firms in the wake of an Evergrande
failure threatens to destabilise an industry that accounts for 29 per cent
of China’s economy, according to new research from Harvard
University economist Ken Rogoff.

Already, developers such as Sunac China Holdings and Guangzhou

R&F Properties have plunged in trading, while their bond yields have
soared. Some 12 real estate companies have reported bond defaults in

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the first half of this year, amounting to 19bn yuan, according to

Moody’s Investors Service.

Trading of Evergrande shares was suspended  Monday in Hong Kong,

along with those of its property management unit. No reason was given
for the halts, according to a stock exchange filing. China’s markets are
closed Monday for a holiday.

China also faces a potential backlash from the 1.6 million homebuyers
who put deposits on Evergrande apartments that have yet to be built.
Getting those projects completed would help avert the type of social
unrest sparked last month by retail investors demanding payment on
some 40 billion yuan in Evergrande high-yield investment products.

“A disorderly default of Evergrande is unlikely  because of the broad-

based risk it presents to a large amount of the Chinese population,”
said Alejandra Grindal, chief economist at Ned Davis Research Inc.
“The government is probably less concerned about restructuring the
offshore debt.”

Homebuyers already face the threat of declining prices after years of

gains. Measures of price growth, housing starts and sales have
moderated significantly in recent months, Moody’s notes in a report.

Given the heightened risk of social unrest, Beijing will try to ensure that
construction workers are paid first in any restructuring, followed by
homebuyers, then suppliers and lenders, said James Feng, the
founding partner of Poseidon Capital Group, a Chinese fund that
specialises in distressed and special situation investments.

To limit the real estate contagion, central bank Governor Yi Gang and
other officials told financial institutions to co-operate with governments
to “maintain the steady and healthy development of the real estate
market” while safeguarding homeowners, according to a statement by
the People’s Bank of China last week.

The regulators asked banks to refrain from cutting off funding to

developers all at once, according to a person familiar with the matter.
Lenders should continue supporting projects under construction and
approve mortgages for buyers qualified for presales, the person said.

The moves by Beijing pushed developer stocks higher on Thursday,

with the CSI 300 Real Estate Index rising 1.2 per cent, for a third-

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straight gain. Markets were closed Friday for a holiday in Hong Kong
and China.

“Given the gigantic size and importance of the sector to the economy,
we expect China to make every effort to avoid a hard landing,
especially at a time when the economy is facing heightened
uncertainty amid a pandemic,” Moody’s analyst Christina Zhu wrote in
a September 30 note.

China has plenty of experience managing collapses of conglomerates

like Evergrande. HNA Group’s restructuring this year may be a model,
according to Citigroup researchers. Following the HNA example,
Beijing would likely step in, break up Evergrande’s businesses and sell
assets to strategic investors. Under this scenario, bondholders would
take a severe haircut and equity investors would be all but wiped out.
Even after last week’s gains, Evergrande’s stock has tumbled 80 per
cent this year.

So far, China has been able to limit Evergrande’s contagion . Standard

& Poor’s said it sees little evidence of a broader spillover into other
parts of the financial markets, with impact confined to single-B rated
developers.

Citigroup expects some fallout from Evergrande, prompting a cut in its

2022 economic growth forecast to 4.9 per cent from 5.5 per cent. The
challenge for China is to support the property sector without stoking
the type of overheating that it’s been working for years to curb.

President Xi Jinping’s mantra is that housing is for living not for

speculating, and Beijing wants to avoid another run up in prices that
would exacerbate inequality in the world’s second-largest economy.
Still, inflicting pain on Evergrande and its investors also sends a signal
that China doesn’t condone massive accumulations of debt and the
moral hazard that often comes with it.

“Regulators will make sure no systemic financial crisis will happen,

which is their bottom line,” said Zhou Hao, senior emerging markets
strategist at Commerzbank in Singapore. “At the same time, they will
punish developers that are highly leveraged.”

Bondholders meanwhile are bracing for a massive haircut from any

restructuring. S&P said last week it expects a “very high chance of
default” for Evergrande given its liquidity situation and $300bn in total
liabilities. The company has likely missed two coupon payments on

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dollar bonds in the past two weeks, and faces a $260 million maturity
Monday on a note sold by a related company known as Jumbo Fortune
Enterprises.

With Evergrande’s main offshore bond trading at about 27 cents on the

dollar, investors like Marathon have little prospects of being made
whole, they’re betting instead on some trading gains in the overhaul.

“We don’t know what that recovery value is but we’re getting close to
the point where it now makes sense” to buy, Richards said in a
Bloomberg Television interview.

What to Know About China Evergrande, the Troubled

Property Giant

The firm’s debts are huge, but Beijing will need to walk a fine line if it
wants to send a message about reckless borrowing while protecting its
economy.

Every once in a while, a company grows so big and messy that

governments fear what would happen to the broader economy if it were
to fail. In China, Evergrande, a sprawling real estate developer, is that
company.

Evergrande has the distinction of being the world’s most debt-saddled

developer and has been on life support for months. Now, it looks to be
facing the biggest corporate restructuring in Asia.

Fitch Ratings, a credit ratings firm, has said the Chinese developer is in
default of its obligations. Evergrande has said that officials from several
state-backed institutions had joined a risk committee that would help the
company restructure itself.

Evergrande is a huge real estate empire with millions of apartments in

hundreds of cities across China. It also has more than $300 billion in
financial obligations, hundreds of unfinished residential buildings and
angry suppliers who have shut down construction sites. Things got so
bad that the company paid its overdue bills with unfinished properties
and asked employees to lend it money.

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What happens next could reverberate through China’s economy,

affecting home buyers, more than 3.8 million jobs, and hundreds of
thousands of employees who work for the company.

Observers are now watching to see how Beijing handles the next chapter
of Evergrande for what it says about the country’s intentions to clean up
the country’s corporate sector by letting “debt bombs” like Evergrande
collapse.

Did Evergrande default?

For months, Evergrande kept the financial markets on edge as it
narrowly averted default several times by making 11th-hour payments on
its bonds. But under mounting pressure and with no cash to keep things
going, Evergrande said on Dec. 3 that it was unlikely to continue to meet
its financial obligations.

The next week, after another deadline on two bond payments came and
went with no sign of payment and no word from Evergrande, Fitch
Ratings placed the Chinese developer in its “restricted default” category.
The category means that Evergrande had formally defaulted but had not
yet entered into any kind of bankruptcy filing, liquidation or other
process that would stop its operations.

In the United States and many other places, this would open the door for
creditors to take legal action to try to get their money back. But Chinese
government officials have closely managed previous corporate
meltdowns to make sure they don’t spiral out of control, so many
investors are waiting to see what plan might emerge.

Evergrande said it would “actively engage” with its foreign creditors to

come up with a plan for restructuring — the often long and drawn out
process of stripping a company down and selling off its parts to pay
everyone off.

Investors could go after assets overseas, but the process could be messy.

“Evergrande is complex and has entities in companies both inside and

outside the People’s Republic of China,” said Daniel Anderson, a partner
at the law firm Ropes & Gray in Hong Kong. “There isn’t a clean, single
legal mechanism that can be implemented to restructure the group. As a
result, it will have to be across jurisdictions, which will make it highly
complex.”

How did Evergrande become such a problem?

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In its glory days a decade ago, Evergrande sold bottled water, owned
China’s best professional soccer team and even briefly dabbled in pig
farming. It became so big and sprawling that it has a unit that makes
electric cars, though it has delayed mass production.

Now Evergrande is seen as a rickety threat to China’s biggest banks.

The company, founded in 1996, rode China’s epic real estate boom that
urbanized large swathes of the country and resulted in nearly three
quarters of household wealth being tied up in housing. This put
Evergrande at the centre of power in an economy that came to lean on
the real estate market for supercharged economic growth.

The company’s billionaire founder, Xu Jiayin, is a member of the

Chinese People’s Political Consultative Conference, an elite group of
politically well-connected advisers. Mr. Xu’s connections likely gave
creditors more confidence to keep lending money to Evergrande as it
grew and expanded into new businesses. Eventually, though, Evergrande
ended up with more debt than it could pay off. In recent years, it has
faced lawsuits from home buyers who are still waiting for the completion
of apartments they paid for. Suppliers and creditors have claimed
hundreds of billions of dollars in outstanding bills. Some have suspended
construction on Evergrande projects.

Why is the company in so much trouble now?

Evergrande might have been able to keep going if it weren’t for two
problems. First, Chinese regulators are cracking down on the reckless
borrowing habits of developers. This has forced Evergrande to start
selling some of its sprawling business empire, and that’s not going so
well.

It failed to sell its electric vehicle business, despite talks with prospective
buyers. Some experts said buyers were waiting for a fire sale.

Second, China’s real estate market is slowing and there is less demand
for new apartments. The National Institution for Finance and
Development, a prominent Beijing think tank, declared the real estate
market boom had “shown signs of a turning point,” citing weak demand
and slowing sales.

Will Chinese regulators step in to save it?

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Image

What happens next is largely in the hands of Chinese government

authorities.

For years, many investors gave money to companies like Evergrande

because they believed Beijing would always step in with a rescue if things
got too shaky. And for decades, the investors were right. But more
recently, the authorities have shown greater willingness to let companies
fail in order to rein in China’s unsustainable debt problem.

When it comes to developers, the authorities have until now been

resolute about not stepping in. So far this year, at least 11 developers
have already defaulted on bond payments.

To emphasize this point, China’s central bank has blamed Evergrande’s

“own poor management and reckless expansion” for its problems and
said the crisis was limited to Evergrande. Yi Gang, the central bank
governor, has indicated that Evergrande was not likely to get a bailout.

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China's Evergrande defaults: What happens next?

As real estate firms Evergrande and Kaisa default on over a billion dollars of

bond repayments after weeks of uncertainty, here is an explainer on what the
debt crisis in China's real estate market could mean for the country's economy.

Evergrande's woes have rocked stock markets -- and the real estate sector makes
up much of distressed dollar-denominated debt internationally. But a default
had long been expected, and fears over a "Lehman moment" -- a reference to the
Wall Street titan whose collapse prompted panic worldwide during the 2008
global financial crisis -- have failed to play out.

That's because Chinese authorities have appeared unlikely to allow the kind of
overnight collapse seen in 2008, with analysts suggesting instead that Beijing
will oversee a "controlled demolition" of the firm.

Is the financial system here, or elsewhere, as vulnerable as it turned out to be in

the wake of Lehman? The answer to that is no," the head of Hong Kong's
Securities and Futures Commission Ashley Alder told Bloomberg TV.

Evergrande had already warned that it may not be able to meet its financial
obligations, meaning the market had been bracing for the news.

The firm's admission prompted the local government in Guangdong -- where it

is headquartered -- to summon billionaire chairman Xu Jiayin, and to announce
they would send a "working group" to the company.

Analysts said this moment signalled the formal start of the giant's debt
restructuring.

"I'd think the market has already priced in the default in Evergrande's and many
others' prices," Chuanyi Zhou, credit analyst at Lucror Analytics, told AFP.

Despite the state's reluctance to bail Evergrande out, its moves to contain the
crisis has eased investor concern of a disorderly collapse.

"The priority would surely be to ensure that homes are delivered, and what
remains afterwards will be repaid according to the priority level of bonds," At
least 11 property firms have defaulted on bonds since concerns started to.

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Chinese property firm Kaisa -- which suspended share trading in Hong Kong on
Wednesday -- was among the latest, deepening the woes of a company
estimated to have $11.6 billion of dollar notes outstanding.

And property firms made up 36 percent of the $10.2 billion of offshore bonds
that Chinese borrowers defaulted on this year, Bloomberg said.

The Evergrande crisis has drawn parallels with government intervention in other
indebted companies, notably aviation conglomerate HNA Group.

HNA's restructuring did not cause investor panic -- although Evergrande's

higher profile means this time will likely prove a bigger challenge.

But whatever happens to Evergrande, Beijing's broader clampdown has already

had a major impact on the property sector and deepened worries over key firms'
financial health, bringing home sales and prices down.

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Conclusion

Because of the potentially catastrophic consequences of such a heavily

leveraged corporation falling, some analysts believe Beijing may intervene to
save it
"Rather than risk disrupting supply lines and enraging homeowners," says
Mattie Bekink of the EIU, "we think the government will probably find a
solution to ensure Evergrande's core business remain
Others, on the other hand, are unsure.Hu Xijin, the influential editor-in-chief of
the state-backed Global Times newspaper, wrote on China's chat app and social
media platform WeChat that Evergrande should not rely on a government
bailout and instead must preserve itself.
This is also in line with Beijing's goal of reducing corporate debt, so a high-
profile bailout could be seen as a negative example. Clearly, much depends on

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how quickly Beijing can assemble a group of developers to accept Evergrande's

contract responsibilities or find another way to avoid a chaotic sale of the
company's assets and significant financial harm to its customers and suppliers.
Clearly, much depends on how quickly Beijing can assemble a group of
developers to accept Evergrande's contract responsibilities or find another way
to avoid a chaotic sale of the company's assets and significant financial harm to
its customers and suppliers.
There are some reasons to be cautiously optimistic that China can still avoid a
truly painful property downturn if a solution is found quickly and Beijing acts to
loosen overall monetary policy. Prices in major coastal markets were mostly
rising in August, but many smaller, so-called third- and fourth-tier markets were
beginning to fall. And, on average, property inventories are significantly lower
than they were at the start of the previous major housing collapse in 2015,
which could help put a floor under prices if sentiment improves: one-and-a-half
years of sales, compared to two-and-a-half years in 2015.

THANK YOU

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