As the Evergande situation unfolds, we might get the answers on why it had influenced global financial markets as much as it did.
Join The True Defender Telegram Chanel Here: https://t.me/TheTrueDefender
So, what is Evergrande actually? And what went so terribly wrong?
“Evergrande is a behemoth of a property developer in China. It owns 1,300 projects in more than 280 cities and is China’s largest property developer by sales.
But it does a lot more than property development. Its business has expanded to include theme parks, electric vehicles, financial services, mineral water and it even owns a soccer team (Guangzhou Evergrande FC).”
According to the Epoch Times,
“Evergrande is estimated to have an eye-watering $300 billion of debt and is now struggling to pay its creditors. On Sept. 23, Evergrande had $83.5 million in interest payments due on dollar-denominated bonds. The Wall Street Journal reported that investors did not receive the funds. Evergrande could be declared bankrupt if the interest payments aren’t met within 30 days of the due date.”
So, what happened for such a massive debt to appear?
“Various regulatory, business, and economic factors have brewed the perfect storm that has resulted in Evergrande’s financial troubles.
Over the years, Chinese authorities have enjoyed the benefits from a booming property market but have more recently become increasingly concerned about the risks the property market poses for financial stability. The Chinese Communist Party (CCP) has introduced different regulatory measures over the years designed to curb property prices. It even created a slogan to discourage property investment: “Houses are for living, not for speculation.”
As part of this crackdown on property investment in August 2020, Chinese authorities directly targeted developers with their “three red lines” policy. This policy limited the amount of leverage that developers could have, and required developers to have sufficient cash to cover short-term debt.
These measures significantly stunted Evergrande, whose business model relied on aggressive borrowing to purchase land and build housing. To comply with these measures Evergrande has been forced to find ways to cut its debt and raise cash, but in March of this year Evergrande was still non-compliant with the “three red lines” and judged to be in the “red zone.”
On top of all this, the pandemic-related lockdowns in 2020 effectively froze the property market for months, bringing down property sales leaving Evergrande strapped for cash.”
To sum it up – for just next year, Evergrande has $7.6bn in bond payments due. Managing these debt obligations will be complex and challenging.
The crisis might not end soon. And I’m guessing, the authorities wouldn’t have an interest in solving this financial massive blowout, as well…
What are your guesses?