Evergrande Crisis: What Is It And Why Is It Too Big To Fail?
My Geek Score: The editor of the state-backed Global Times Newspaper has warned China’s debt-ridden Evergrande Group against betting on a government bailout, believing it is too big to fail.
The company has warned investors that it could not service its debt. Rating agencies Fitch say such fall is likely and Moody’s says it has the money to do so on time. Still, on the verge of collapse, the news sent global markets tumbling in trading on Monday.
What is Evergrande Crisis?
Evergrande, a huge Chinese Real Estate Developer, is in deep trouble with the Chinese Government and is one of the largest developers with huge debts, owing $300 billion to Banks and Bondholders. The company is due to repaying its offshore bonds on Thursday after talking of “unprecedented difficulties” last week.
The company’s potential for default has spread to markets outside China, owing to the company’s huge and high-yielding offshore bonds. The company is part of the Global 500, which means it is also one of the largest companies in the world in terms of revenue.
Listed in Hong Kong and based in Shenzhen, Southern China, it employs around 200,000 people. It also indirectly helps to keep up over 3.8 million jobs every year.
When things are going well, Evergrande Group is China’s largest private real-estate developer, using monstrous credit and China’s real-estate mania to spur growth. Also known as the Hengda Group, the company has over 1,300 projects in over 280 cities in China. It also includes more than just real estate development.
What if China let it Collapse?
The price of not keeping Evergrande afloat could also be excessive. Markets are worried about the contagious effect that an Evergrande collapse will have on the World Economy; comparisons to Lehman Brothers’ insolvency in 2008 and the financial meltdown that followed, have already been reported. There is no right time to associate an economic crisis; however, a particularly bad time is when the world is already in the grip of a pandemic. .
If Evergrande were to go to bankruptcy court and restructured its debt, its investors would all face huge cuts in what they own. But according to the so-called “seniority cascade” – the pecking order in which creditors are paid – the Chinese Government itself makes the first money since state-owned banks are among Evergrande’s biggest creditors. Private investors, who are further down the waterfall, will take a big hit. So will the 1.7 million people that place down payments for Evergrande homes which will never be built.
The same will be true for Evergrande employees, who have been forced to lend the company money. This poses another type of danger to the government: the specter of public protests. Chinese authorities are extremely sensitive to social unrest, always fearing it could escalate into a broader anti-government movement.
Is Evergrande become too Big to Fail?
The potentially terribly serious fallout from the collapse of such a heavily indebted company has led a few analysts to believe that Beijing could step in to save it.
EIU’s Mattie Bekink thinks: “Rather than risk disrupting supply chains and infuriating owners, we believe the government will likely find a way to ensure the survival of Evergrande’s core business.
Others, however, are not sure. In an article published on the Chinese chat app and social media platform WeChat, influential Editor-In-Chief of the government newspaper Global Times Hu Xijin said that Evergrande should not rely on a government bailout. and rather must save itself.