Evergrande: Is it 2008 all over again? 📉
What is Evergrande? Why is it in the news? Will we see another financial meltdown?
Hi, Ravdeep here. 👋
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Have you been seeing the word ‘Evergrande’ a lot online and wondering what is it and how it affects you? Well, even I have been reading about it a lot recently and it turns out it is definitely a bigger deal than people are making it out to be. Strap yourselves in and let me give you a quick look into this real nightmare.
What is Evergrande? 🏦
The Evergrande Group or the Evergrande Real Estate Group is China's second-largest property developer by sales. It is a Fortune Global 500 enterprise & the biggest residential developer in China with yearly sales amounting to $110B. It employs 200k people directly & creates 3.8m jobs each year indirectly. It also has an interest in a number of other markets like electric vehicles, sports, music, etc.
What is going on with Evergrande right now? 🤔
Let’s look at the timeline of where we are and what led to this:
A few months back the Chinese Communist Party (CCP), the government of China, laid out what they call their Three Red Lines about debt based growth for large developers: A 70% ceiling on liabilities to assets, a 100% cap on net debt to equity, and cash to cover short-term borrowing. This move was done to cut financial risk & promote affordable housing in the country.
Due to these ‘Three Red Lines’, Evergrande has been heading towards a default on making payments on a reported debt of at least $305 billion. Few of these payments are coming up in the next few months but most of them are due in 2022. (To put that in perspective $300B USD is the entire GDP of countries like Ireland, Denmark, Hong Kong or Portugal.)
Evergrande is at a point where it does not have enough money to pay these loans, pay contractors and other vendors working on their unfinished properties. Some reports point towards them offering unfinished apartments in lieu of cash payments.
They have also contracted out the best of debt protection law firms and agencies and have also promised partial repayment to a few investors, including foreign investors like UBS, JP Morgan and the western banks. This has led to a downgrade from major credit rating agencies worldwide.
This has further proceeded into a downward spiral which usually happens when large institutions start failing - can’t borrow more money as they cannot repay money borrowed already which leads to no money available to complete properties to sell.
Where are we heading with this and why we should care? 🔥
This represents a HUGE systemic risk for China’s economy and potentially other economies of the world. Evergrande has a huge network which touches various parts of the economy through its hiring of vendors, agencies and the large number of businesses they deal with - including smaller developers.
On September 15, 2008, Lehman Brothers collapsed dissolving $600B in US assets leading us to the worst market crash since the great depression. Right now, Evergrande has $200B~ in assets, and $300B in unserviced debt which is $500B total. So its entirely on the same level as the assets that Lehman Brothers had!
Although, Lehman Brothers was a US bank broadly diversified across many industries. Whereas, Evergrande is only in one industry and its debt is held by banks across China, the US, Canada, UK, Australia and others. This means defaults on bonds along with billions of unpaid dollars to Chinese contractors and goods suppliers. It also means the largest ever bulk real estate liquidation ever if Evergrande goes under. That real estate collapse would mean the asset sheets of other real estate developers, banks and mortgage companies in China would all crumble.
China owns 15.5% of the global debt, and with this crisis in their country, they will actively start pursuing this external debt.
Can this be prevented?🚰
There is a chance that the CCP steps in and finds a way to bail out or unwind Evergrande. Their internal policies do point to this direction but it will still have mass implications as the bailout will be done for pennies on the dollar.
But if they decide to let it be, then the market conditions are primed for a full-scale meltdown further exacerbated by all time high stocks, huge inflation and disconnected markets.
There is also another take on this situation that considering the fact that the majority of the loans given to Evergrande were from Chinese banks itself, it might not lead to a spiral at a level even close to what happened in 2008 but I believe only time will tell how the CCP handles this and how the world markets react to this news.
What is your take on the whole situation with Evergrande? Will the world governments let it play out as another version of 2008 or will we stop this right now only to push it further into the future for a bigger meltdown? Let me know your views!
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