According to reports, Chinese property giant Evergrande may default next week with debts over $300 billion. The looming crunch may not worry investors worldwide, but it could still rock financial markets, according to analysts.
Investors have long worried about the possibility of a bursting property bubble in China. According to the Financial Times, China’s economy is driven by a heavily leveraged real-estate sector.
The Chinese government is debating how to deal with Evergrande’s dire situation. At the same time, Evergrande’s approximately $19 billion in dollar-denominated bonds holders wait to see what will become of their investments. Hong Kong shares of Evergrande, have plunged 83%.
Here’s a tweet thread by a trader that explains the recent events and analysis revolving around Evergrande. The tweet recently went viral and Michael J Burry shared it over his timeline. Yes, The 2008 Michael J. Burry.
Markets around the world have been relatively unswayed. Stock indices in the United States ended the week with losses. The Dow Jones Industrial Average DJIA, -0.48% fell by 0.1%, and the S&P 500 SPX, -0.91% was expected to drop by 0.5%.
Here, a women is seen attempting suicide inside Evergrande Headquarters
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There would, however, be contagion in the event of liquidation.
- It would lead to investors getting extremely low recovery values, hurting the confidence of real estate sector and Asia high-yield offshore markets, and result in spillovers into global financial markets.
- Due to both bank and nonbank exposure to Evergrande, there could be a domino effect of credit events.
- In this event, spillovers would affect other Chinese financial assets and market performance, leading the way to underperformance in both [developed markets] and [emerging markets] financials, led by those names with direct exposure to either Evergrande itself, its subsidiaries or its creditors.
- Chinese offshore and onshore bonds could face heavy selling pressure and liquidity distortions as a result, whereas we may also see spillovers to EM credit, since several EM credit accounts do tend to hold Chinese offshore bonds as part of their Asia high-yield exposure.
- Stocks were modestly down partly due to concerns over the distribution of the delta version of Coronavirus as well as how that might impact stock prices.
What is Evergrande?
The Evergrande Group (previously Hengda Group) is China’s second-largest property developer by sales making it the 122nd largest group in the world by revenue, according to the 2021 Fortune Global 500 List. It is based in southern China’s Guangdong Province, and sells apartments mostly to upper and middle-income dwellers. In 2018, it became the world’s most valuable real estate company
The holding company of the group is incorporated in the Cayman Islands. Its headquarters are in the Excellent Houhai Financial Center in Nanshan District, Shenzhen.
In August 2021, the Financial Times reported that Evergrande Group is facing a record number of cases filed by contractors in Chinese courts as pressure mounts on the company’s management to reduce its $300bn in liabilities, including around $100bn in debts.
In mid-September 2021 it was reported that the company was in danger of being unable to issue payments on loan interest due on 20 September. It was estimated that around 1,500,000 customers could lose deposits on Evergrande homes that have yet to be built if the company goes under.
Real Estate is at the forefront of the Chinese real estate market and is known as “Wan Heng Bi” with the other two top three real estate companies, Vanke and Country Garden.
In March 2010, they bought all shares of Guangzhou F.C. for 100 million yuan. On April 16, 2020 Evergrande opened the construction of Guangzhou Football Stadium in Xie Village, Panyu District, Guangzhou.
Group announced in November 2019 that it will invest 45 billion yuan over the next three years to develop new energy vehicles, build three production bases in Nansha, Guangzhou and Shanghai, and launch the first batch of electric vehicles in the name of “Evergrande New Energy Vehicle “in 2020. Hengchi series concept was incorporated into Guanghui Group, the world’s largest auto dealer, to establish a sales network; a “State Grid” joint venture company was formed with State Grid to provide intelligent parking services in condominium parking lots. In June 2020, Evergrande Group acquired the remaining 49% of NEVS for $380 million, after having acquired 51% of the shares for $931 million in 2019.
Tourism and entertainment
Hengda group tour operators are two major theme park brands “Hengda children of the world”, “Hengda water world”, and Hainan has a large tourist complex “Chinese island of Hainan to spend”.
“Health Group” primarily operates “Health Valley” in the retirement apartment community and works with Brigham and Women’s Hospital in Massachusetts to manage Hainan’s “Boao Evergrande International Hospital”. In 2015, Evergrande Health Industry was formed by the holding Evergrande Real Estate Group Co., Ltd. (the predecessor of the China Evergrande Group) and the Wonchen Medical Beauty Group of South Korea, forming the “Hengda Wonchen Medical Beauty Hospital”.
Heng Teng Network in 2015 by Evergrande Real Estate Group Co., Ltd (predecessor of China Hengda Group) and Tencent, in Guangzhou, set up (head office) a joint company in Shenzhen “Karen Teng Network Limited “. On October 26, 2020, Hengteng Network announced that it would acquire 100% of Ruyi Pictures by issuing new shares at a total transaction price of approximately HK $7.2 billion.
Group acquired a 50% stake in Sino-Singapore Great Eastern Life Insurance Company in 2015 and changed its name to Evergrande Life. In addition, Evergrande Group is the largest shareholder of Shengjing Bank, holding 17.28% of the shares.
Group has been involved in the grain and oil, dairy and mineral water businesses. Evergrande Group launched “Hengda Bingquan” mineral water in early 2014 and invited numerous artists including Jackie Chan to advertise with 6 billion yuan in advertising fees. After a huge loss of 4 billion yuan and left the market in 2016.
Hengda Group in December 2010 money into the creation of Hengda music, invited Song Kenan, chairman, Gao Xiaosong served as music director, invited Jin Zhipeng, the great Zhang became his signature artists, touring the creation of the “Hengda Star Music Festival” brand, retired from business in 2015, “Hengda Music” was renamed “Xinao Music”.