Evergrande: A Crisis That Has Hit China But Its Effects Are Felt In India; How It'll Impact You

Over the past few weeks, the financial and economic world has been worried about the likely collapse of Evergrande, the most-indebted real estate company in the world right now.

The company has hit a series of deadlines for bond interest payments, struggling to meet $300 billion of repayments to lenders. As the company struggles to meet those payments, it has started to repay some investors in its wealth management business with property. Let us first understand more about the crisis.

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What does Evergrande do?

Founded in 1996 in Guangzhou, southern China, Evergrande Real Estate currently owns more than 1,300 projects in over 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.

Its founder Hui Ka Yan 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 the company 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.

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Why is it worrying?

This uncertainty has seen Evergrande's share price tumble by around 80% this year. Its bonds have also been downgraded by global credit ratings agencies. It is faced with nearly 800 unfinished residential buildings, many unpaid suppliers and over a million home buyers who have partially paid for their properties.

Further, China¡¯s extended property boom that started in the mid-1990s has now ensured that nearly three quarters of the country¡¯s household wealth is locked up in housing.

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What are its possible effects?

An impending collapse at the biggest real estate company could have a serious knock-on effect on the entire economy, dragging down growth and potentially setting off a cascading impact that could singe the global commodities and financial markets.

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.

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.

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How will it impact India?

Indian investors must see the developments in China as a continuation of the trend that started with the Trump-Xi trade war. This will only accelerate the move towards a China+1 policy of global businesses, which is expected to benefit India.

In the near term, there may be minor outflows from the Indian markets as global investors with significant exposure to Chinese developers seek to rebalance their portfolios due to losses and redemption pressure.

However, in the mid to long term, this could result in higher allocation to India by investors. The most visible impact for Indian investors would be the likely easing of inflationary pressures.

Bloomberg

In India¡¯s stock markets, the metals segment, which has been surging since the start of the year and appeared to show signs of overheating, tanked sharply on Monday. Analysts view this more as a short-term correction, but there could be an extended impact if the crisis in China were to remain unresolved.

India¡¯s buoyant iron ore exports, much of which is headed to China, could also see an impact if the twin crises in China triggers an extended slowdown in the Chinese real estate market. And there could potentially be a sustained impact on global growth prospects, dampening the nascent recovery that is underway in markets such as India.

Would the world experience a crisis as such for the 1st time?

Given the 2008 recession also began with a real estate crisis in the US, many fear similar repercussions this time as well. In 2008, when Lehman Brothers collapsed in the US, the world witnessed an of its kind financial meltdown in recent history.

Cut to 2021, just after the world has been through the economic rollercoaster of the COVID-19 pandemic, China¡¯s Evergrande is the next looming crisis that the market is seeing.