The impending fall of Evergrande symbolizes the current plight of the Chinese economy

The Chinese real estate giant, the Evergrande group, informing overnight that there is “no guarantee” that it will be able to meet its debts of 305 billion dollars, starting with a deadline on Monday which could trigger a default, the implications for global financial markets, as well as for the Group’s interests in entertainment, sport and tourism are significant.

Shares of Evergrande, China’s second-largest real estate developer with thousands of projects, fell early in trading on Thursday amid concerns over unsustainable debt, sparking fears of contagion in China’s real estate sector.

This follows Evergrande announcing on Wednesday that it had officially abandoned its plan to sell a 50.1% slice of Evergrande Property Services, one of its most profitable units, and said there had “no guarantees” that he could meet his financial obligations in order to stay afloat. .

The company has been trying to offload assets since September to generate funds to pay off creditors, starting with 1.6 million homebuyers who bought as yet unfinished properties off plan, contractors and suppliers, then banks and Chinese bonds.

Evergrande also owes billions of dollars to offshore bondholders and has already missed several key bond interest payments since September.

Explaining the Evergrande crisis and its aftermath, Kunal Sawhney, managing director of Kalkine Media, a regular contributor to Australasian Leisure Management, writes that China’s transformation from an agrarian economy to a capitalist one has been rapid. As a result of the transformation, large conglomerates like Evergrande have emerged that have propelled China to new heights and helped it become one of the most powerful nations in the world. However, as they say, “change is the only constant in life”, the fall of Evergrande symbolizes the current plight in China.

Before the fall of Evergrande
As China embarked on a journey of transformation into a capitalist structure, Evergrande emerged. It enabled Chinese villages to become metropolitan cities. Initially, he appealed to the middle class community of China, and later he stepped up his activities by venturing out with other big giants.

Businessman Hui Ka Yan was the first founder of Evergrande; initially it was known as Hengda Group in 1996 in southern China. Now, Xu Jiayin is the man behind the Evergrande brand. He has become one of the most influential people in Beijing and beyond. His brand owns several food brands, manufactures electric cars and sponsors one of the biggest soccer teams in China.

What got Evergrande into trouble?
Evergrande has developed its activity exponentially via lump sum loans. However, recently, the Chinese government has changed its policies with the aim of restricting large conglomerates like Evergrande to depend on an extensive borrowing system.

Currently, the real estate developer has more than US $ 300 billion from its investors. And, after the new Chinese government amendments, he had to offer his properties at discounted rates to keep the money coming in.

Due to the sale of properties at high rates, the company suffered huge losses and was unable to repay the recent interest payment to its investors. As a result, Evergrande’s stock prices immediately fell to 80%, and bond prices are now also rated low by global rating agencies.

What implications does the world have to endure after the Evergrande withdrawal?
When large conglomerates like Evergrande suffer losses, the implications are manifold. The capitalist world is strongly intertwined. Companies, organizations, committees and individuals all work together in a system of co-dependency. And, when one is in pain, the effects must be borne by others as well.

This is the case with recent problems encountered by Evergrande.

The company would not pay its interest to inventors, which rocked the market. If Evergrande were to end, the consequences would be enormous for the Chinese economy and the world economy.

First, being China’s largest real estate company, thousands of people had purchased properties in Evergrande before construction began. So if Evergrande goes bankrupt, all buyers will lose their down payments. In addition, other construction and design companies that work with Evergrande would also suffer losses in the event of decommissioning.

However, the most important consequence would be borne by the Chinese financial system. Evergrande borrowed money from 171 national banks and 121 other financial companies. Thus, if the company goes bankrupt, the Chinese financial system will suffer a significant backlash.

If this happens, China’s financial system will experience a credit crunch, as a result of which other companies would face borrowing problems.

Being the world’s second-largest economy, China has multiple impacts of its national economy on the global economy. If the country enters a credit crunch, it won’t be a good sign for businesses, especially when industries finally get back on track after stagnating for more than a year.

Also, the huge implication of the credit crunch would be that foreign investors would be reluctant to invest their money in China. Thus, the country must see how it will run its business and its financial system without hurting either.

In addition to real estate, the Evergrande group is interested in the automotive, health, agrifood and finance sectors.

In leisure, his interest includes:

Tourism and leisure
Evergrande has two major theme park brands “Hengda children of the world”, “Hengda water world” and a big tourist on the Chinese island of Hainan to spend.

One of its major projects is the Island of Ocean Flowers under construction in Hainan.

sport
In 2010, the Group acquired Guangzhou Evergrande FC from the Chinese Super League and invested heavily to acquire the best players. In 2013, under Marcello Lippi, the group won the 2013 AFC Champions League. Alibaba also owns a 50% stake in the football club.

In April of last year, Evergrande began construction of the Guangzhou Evergrande football stadium.

The company sponsors the Women’s Guangdong Evergrande Volleyball Club and manages the Evergrande Football School.

Entertainment
The group operates HengTen Networks, which purchased Ruyi Pictures in October 2020 and hosted the Hengda Music Festival Tour Concert.

Kunal Sawhney, Managing Director, Kalkine Media

Images © Lewistse | Megapixl.com (top), the new stadium built by the Group for Chinese Super League champions Guangzhou Evergrande (middle) and © Casfotoarda | Megapixl.com (below).

About the Author

Kunal sawhney

Managing Director, Kalkine Group

A groundbreaking entrepreneur, Kunal Sawhney is a finance professional with a broad equity knowledge who aims to transform the delivery of equity research through technology-driven digital platforms.

Using his knowledge, skills and global vision, Sawhney created Kalkine (a company based on digital architecture and in-depth research led by data science) which has grown into one of the market research companies at the fastest growing in Australia in 2014; and subsequently in other emerging and developed markets.

Sawhney’s entrepreneurial and business skills, supported by a passion to establish a technology-based research platform, have helped strengthen Kalkine’s global presence in various geographies – Australia, New Zealand, Canada and the UK. United. Additionally, US launch plans in 2021 laid the groundwork for reaching a global customer base for Kalkine’s subscription and media operations.

Holds an MBA from Sydney University of Technology; Sawhney’s business acumen has enabled his original idea, Kalkine, to help clients navigate fairness-related issues in a competent and transparent manner.

Sawhney is featured regularly on CNBC, Sky Business, Biz News, Daily Mail, Yahoo Finance, KCBS Radio (Audacy), Bloomberg, Sydney Morning Herald, Global Banking and Financial Review and many more.

Click here to visit the Kalkine website.

Read more about this author

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